History of Credit Scores

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on August 25, 2023

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Understanding Credit Scores

A credit score, as a numerical representation, plays a pivotal role in determining an individual's creditworthiness, consolidating their financial behavior into a concise value that facilitates prompt decision-making for lenders.

Payment history, credit utilization, length of credit history, types of credit used, and recent credit inquiries are among the key components evaluated to calculate the credit score.

Credit bureaus, functioning as centralized repositories of credit data, hold significant responsibility in the collection and compilation of credit information from a diverse range of sources, including banks, credit card companies, and other financial institutions.

Inception of Credit Scoring

Before the standardization of credit scores, credit evaluation methods were subjective and inconsistent, making it challenging for businesses to make reliable lending decisions.

However, in the late 1800s, retail credit associations emerged as a response to this issue. These associations collected and analyzed credit data on consumers, creating a more organized and structured approach to credit assessment.

By providing businesses with access to comprehensive credit information, retail credit associations enabled lenders to make better-informed decisions, mitigating the risk of defaults and non-payment.

In 1899, a significant milestone in credit reporting was achieved with the establishment of the first official credit bureau, the Retail Credit Company (now Equifax).

Founded by Cator and Guy Woolford, this pioneering bureau aimed to centralize credit information and serve as a valuable resource for businesses seeking to evaluate the creditworthiness of potential customers.

FICO Score Revolution

The credit scoring landscape experienced a transformative shift with the introduction of the FICO score in 1989, a brainchild of engineer Bill Fair and mathematician Earl Isaac.

This marked the birth of Fair Isaac Corporation (FICO), dedicated to developing this revolutionary scoring model. The FICO score brought standardization and objectivity to credit assessment, utilizing a mathematical algorithm to quantify credit risk.

Initially developed for specific industries, the FICO score rapidly gained popularity and adoption among lenders and institutions. Its widespread acceptance made it the dominant credit scoring model not only in the United States but also internationally.

The FICO score set a precedent for credit reporting, providing a benchmark for other scoring models that followed.

Evolving Credit Scoring Models

In the pursuit of more refined and competitive credit assessment, alternative credit scoring models emerged alongside the FICO score.

Notably, the VantageScore was introduced in 2006 as a collaborative effort by the major credit bureaus - Equifax, Experian, and TransUnion.

VantageScore aimed to offer a consistent alternative to the FICO model, considering similar credit factors but potentially weighting them differently. As a result, slight variations in credit scores between the two models may arise.

In addition to general credit scores, industry-specific credit scores have also gained traction, catering to the specific needs of lenders in specialized domains such as auto loans and mortgage lending.

These evolving credit scoring models reflect the ongoing quest to enhance credit assessment accuracy and tailor it to diverse lending scenarios.

Legal and Regulatory Aspects

Recognizing the immense impact of credit scores on individuals and the economy, the United States took a significant step in 1970 by enacting the Fair Credit Reporting Act (FCRA).

The FCRA plays a crucial role in governing credit reporting agencies and regulating the use of consumer credit information.

It empowers individuals with essential rights, including access to their credit reports, the ability to dispute inaccuracies, and request corrections.

The FCRA also imposes restrictions on the duration for which certain negative information can be reported, providing individuals with a chance to rebuild their credit over time.

Additionally, the act ensures that credit reporting agencies adhere to strict guidelines to maintain the accuracy and fairness of credit assessments.

Beyond the United States, other countries have also implemented their own regulations to protect consumer data and promote equitable credit assessment practices.

Technological Advancements in Credit Scoring

Technological advancements have ushered in a new era of credit scoring, enhancing the accuracy and efficiency of credit risk analysis. The integration of machine learning algorithms and artificial intelligence has revolutionized credit scoring models.

These algorithms have the capacity to process vast volumes of data and detect intricate patterns that traditional scoring methods might miss.

As a result, credit scoring models have become more predictive and dynamic, providing lenders with deeper insights into an individual's creditworthiness.

Additionally, big data and alternative data sources have enriched credit scoring data sets, offering a more holistic view of a person's financial behavior.

Utility payments, rental history, and other non-traditional data points are now factored into credit assessments, which has expanded credit access to individuals with limited credit histories.

However, while technological innovations have undoubtedly improved credit scoring, it is essential to address concerns regarding data privacy and potential biases to ensure fairness and transparency in the credit evaluation process.

Credit Scores Today

In today's financial landscape, a variety of credit scoring models are used by different lenders. However, the FICO score remains one of the most prevalent, with the company claiming that 90% of top lenders utilize their scores.

An essential aspect of FICO's credit scoring methodology is the elimination of factors like race, age, gender, and marital status, which were previously considered in credit reporting and scoring.

Instead, FICO relies on five key factors to calculate an individual's credit score:

  • Payment History (35%): This factor assesses whether individuals have paid past credit accounts on time, emphasizing the importance of timely bill payments to maintain a positive credit history.

  • Amounts Owed (30%): Also known as credit utilization rate, this factor evaluates the total amount of credit and loans an individual is currently using compared to their total credit limit.

  • Length of Credit History (15%): The length of time a person has had credit accounts is taken into account, rewarding individuals with longer credit histories who have demonstrated responsible credit management over time.

  • New Credit (10%): This factor considers how often an individual applies for and opens new credit accounts, as numerous credit inquiries in a short period may indicate financial instability.

  • Credit Mix (10%): The variety of credit products an individual possesses, such as credit cards, installment loans, finance company accounts, and mortgage loans, is evaluated to assess credit diversification.

Moreover, there has been an effort to incorporate non-traditional data into credit scoring. In 2019, Experian Boost was introduced, allowing users to include recurring payments, such as utility bills and monthly subscriptions, in their Experian credit report.

This addition offers an opportunity for consumers to boost their credit scores by showcasing responsible payment behavior beyond traditional credit accounts.

As credit scoring continues to evolve, the inclusion of alternative data sources can potentially broaden credit access and provide a more comprehensive view of an individual's creditworthiness.

Impact of Credit Scoring on Consumer Lending

The impact of credit scoring on individuals and the financial industry at large is profound. Credit scoring has revolutionized the way lenders assess creditworthiness, leading to increased efficiency and access to credit.

Enhanced Lending Decisions

By providing a standardized and objective assessment of credit risk, credit scores enable lenders to make faster and more accurate decisions on loan approvals and interest rates.

This efficiency has facilitated greater access to credit for many individuals, allowing them to obtain loans and credit cards more easily.

Access to Financial Products

A good credit score often results in lower interest rates and better loan terms, providing borrowers with cost-saving benefits.

On the other hand, a poor credit score may limit access to credit or lead to higher interest rates, potentially creating financial challenges for those with subpar credit histories.

Financial Inclusion and Disparities

Some segments of the population, such as young adults, immigrants, and individuals with limited credit histories, may have difficulty obtaining credit due to the lack of sufficient credit data.

This can perpetuate economic disparities and hinder social mobility.

Potential for Biases

Credit scoring models rely on historical credit data, which may inadvertently reflect existing economic and social biases.

Factors like race, ethnicity, and gender are not directly included in credit scores, but they can indirectly influence credit outcomes due to disparities in socioeconomic opportunities.

Interest Rates and Borrowing Costs

Credit scores have a direct impact on interest rates for loans and credit cards. Borrowers with high credit scores typically qualify for lower interest rates, reducing the overall cost of borrowing.

Conversely, individuals with lower credit scores may face higher interest rates, resulting in higher borrowing costs over time.

Creditworthiness Beyond Traditional Data

The evolution of credit scoring has seen the inclusion of alternative data sources, such as utility payments and rental history, to assess creditworthiness.

This shift aims to provide more comprehensive credit evaluations and extend credit access to individuals with limited credit histories.

Financial Responsibility and Consumer Behavior

Credit scoring incentivizes responsible financial behavior, as it rewards individuals with positive credit habits.

Consistently making on-time payments and maintaining low credit card balances can lead to improved credit scores, which in turn offers better financial opportunities and access to more favorable credit terms.

Impact of Credit Scoring on Consumer Lending


Credit scoring has transformed the financial landscape by providing standardized and objective assessments of creditworthiness, facilitating faster and more accurate lending decisions.

The introduction of the FICO score revolutionized credit assessment, setting a benchmark for other models to follow.

Over time, alternative credit scoring models and the integration of machine learning and big data have further enhanced accuracy and credit access.

However, while credit scoring has improved financial inclusion, disparities still exist, and potential biases must be addressed to ensure fairness.

Credit scores play a significant role in interest rates, borrowing costs, and access to financial products, incentivizing responsible financial behavior and rewarding those with positive credit habits.

As credit scoring continues to evolve, the inclusion of alternative data sources offers the potential to broaden credit access and provide a more comprehensive view of an individual's creditworthiness, promoting financial health and stability.

History of Credit Scores FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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