When Does Credit Score Start? A brief look at the long history

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Whether you are registered First credit card or apply for a mortgageyour credit score plays an important role in determining if you can achieve many of your financial goals. Your Credit report And that three-digit credit score can also make a big difference in how much interest you’ll pay on loans and the types of loans or credit cards you’ll qualify for.

Credit reports and credit scores as we know them today are part of a long history of merchants and lenders gathering information and using that information to assess whether a potential borrower ability to repay their loans in full and on time.

Option spoke with Josh Lauer, associate professor of communications at the University of New Hampshire and author of “Credible: History of Consumer Surveillance and Financial Identity in the US“to understand more about how credit scoring and credit reporting came into being, and how both eventually became such an important part of our lives.

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The rise of credit reporting

Before credit scoring, there were commercial credit reports. Unlike consumer credit reports, in which individuals are assessed for their credit risk, commercial credit reports are initially used by merchants to gauge their creditworthiness. potential corporate customers.

In 1841, Mercantile Agency was established was one of the first commercial credit reporting agencies, using people known as informants to gather information about lenders and borrowers across the country. In a way, it works a bit like a modern-day credit reporting agency, collecting information about a businessman’s marital status, ethnic origin, credit history and age, then entered into a centralized ledger in one location, New York City. .

This type of credit report is based on subjective method assessment – in other words, reporters will make judgments about people based on their race, gender, and moral background.

It wasn’t until the late 19th century, when department stores and mass retailers became commonplace, that consumer credit reporting really took off.

Some mass retailers are installment houses, which sell items such as furniture and drugs to customers through installment loans. Retailers needed a way to engage consumers and ensure they got their payback, so they gathered information about their customers and submitted that information to the local credit bureau.

While there are three major consumer credit bureaus today – Equifax, Experian and TransUnion – in reality, it would take hundreds of years to develop a centralized national credit bureau.

Credit scoring works

It was not until credit reporting was computerized in the 1960s that the industry was consolidated.

In the 1960s, there were more than 2,000 credit bureaus across the United States. Over the next 20 years, that number will drop to the five and eventually three major credit bureaus that exist today, Lauer explained.

“Before [the 1960s]All the files are in the filing cabinet, on papers and cards, says Lauer. They go to a town and buy all the local credit bureaus with it all [of] their information and then computerize it. “

However, it will take longer for credit scoring to become widely available in the United States, as lenders are hesitant to abandon the use of character rating in assessing someone’s creditworthiness.

Today, FICO Score considered the most widely used type of credit score.

According to Sally Taylor, vice president and general manager of FICO Scores, the company was founded in 1956 and will initially work with corporate clients to develop company-specific credit scoring models. there.

A company would hire FICO, explains Lauer, and then use its client files to create a personalized model, which would then be used to calculate the credit risk of a company. client.

In 1989, FICO worked with national credit bureaus to create a credit scoring model that could be used to rate all consumers – this is when the first universal credit score was born. .

“The idea that there is a common model means that many different companies can use credit scores for the first time and this makes credit scoring more accessible and common,” says Lauer. much for lenders.

FICO scores later solidified as an important part of financial decision-making when Fannie Mae and Freddie Mac began requiring mortgage applicants to submit them in the mid-1990s.

Credit score today

Today, there are many different types of credit scoring models used by many lenders. FICO, however, remains one of the most widely used – the company claims its scores are used by 90% of the top lenders.

FICO’s Credit Scoring Models has evolved since 1989 to account for ever-changing consumer behaviors. Today, scores range from 300 to 850, with higher scores indicating a greater likelihood that consumers will pay back their loans in full and on time.

Unlike previous credit reporting and scoring methods, factors such as race, age, gender, and marital status are no longer considered. Instead, five factors used to calculate an individual’s FICO credit score:

  1. Payment history (35%): Have you paid your previous credit accounts on time?
  2. Amount owed (30%): The total amount of credits and loans you currently use compared to your total credit limit – this is also known as your utilization ratio
  3. Credit history length (15%): Time period you have credit
  4. New credit (10%): How often you sign up and open new accounts
  5. Credit structure (10%): Wide range of credit products available to you, including credit cards, installment loans, finance company accounts and mortgage loans

In recent years, there has also been an effort to include data that is not normally used for credit scoring. * Experian Boost™ was launched in 2019, allowing users to include recurring payments like utility bills and monthly subscription payments on their Experian credit report.

Experian Boost™

On Experian’s secure site

  • Cost

  • Increase your average credit score

    13 points, although the results are different

  • Credit report affected

  • Credit scoring model used

In America, 26 million Americans considered ‘invisible’ credit due to lack of credit history, with the problem affecting many Black, Hispanic and low-income individuals. Experian Boost can be a useful tool for people with poor credit scores – or no credit scores at all – as it allows information regarding on-time payments to be included in the credit report. theirs, which may help improve a bit.

For those who want more insight into their credit score and to track changes in their credit profile, consider credit monitoring service. Both Experian’s Free Credit Monitoring and Experian IdentityWorks℠ provides you with potential fraud alerts that can help protect against identity theft.

Other free options to view your credit score include CreditWise from Capital One show you your VantageScore from TransUnion or Explore credit scorecards display your FICO Score from Experian.

Experian Dark Web Scan + Credit Monitoring

On Experian’s secure site

  • Cost

  • Supervised credit bureaus

  • Credit scoring model used

  • Dark Web Sweeping

  • Identity insurance

Experian IdentityWorks℠

On Experian’s secure site

  • Cost

    $9.99 to $29.99 per month

  • Supervised credit bureaus

    Experian for Plus or Experian, Equifax and TransUnion for Premium

  • Credit scoring model used

  • Dark Web Sweeping

  • Identity insurance

    Yes, up to $500,000 for Plus and up to $1 million for Premium*

* Identity Theft Insurance is guaranteed by subsidiaries or affiliates of American International Group, Inc. (AIG). The description here is a summary and is for informational purposes only and does not include all terms, conditions and exclusions of the policies described. Please refer to actual policies for coverage terms, conditions, and exclusions. Coverage may not be available in all jurisdictions.

*Results may vary. Some may not see improved scores or approval rates. Not all lenders use Experian’s credit profile, and not all lenders use scores affected by Experian Boost.

Editing notes: The opinions, analysis, evaluation or recommendations expressed in this article are the sole opinions of Select’s editors and have not been reviewed, approved or endorsed by any third party.

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