A BRIEF HISTORY OF CREDIT SCORING

Most people know they have a credit score and know it affects their ability to get credit, but fewer understand how credit scoring began and evolved. Credit scoring has been used since the 1950s to help department stores make decisions about extending credit to customers. Within 20 years the majority of the nation’s commercial banks, credit card companies, and finance companies were using credit scoring, but it wasn’t until the practice was adopted by Freddie Mac and Fannie Mae to use credit scoring for mortgage lending that it became a widely adopted practice. Credit scoring is fully automated, making it quick and easy to calculate a person’s credit score and make an objective judgement based on his or her credit-worthiness. The process for using computers and mathematics to calculate a credit score was created by William Fair and Earl Isaac, when they began the Fair Isaac Corporation (FICO). This is why a person’s credit score is sometimes referred to as their FICO score. It wasn’t until the 1990s that consumers were given access to their credit scores. In 2001, California ruled residents were entitled to know their credit scores, in addition to everything credit bureaus reported to lenders. Due to that ruling, Fair Isaac decided to give credit scoring access to all American consumers. Though initially reluctant, it was the idea of selling credit scores that finally convinced them to expand the access beyond California, where it was legally required. It didn’t take long before the three major credit bureaus decided paying money to FICO for scores was not something they wanted to do, so they created their own credit scoring model that was launched in 2006, called the Vantage Score. The Vantage Score has been updated over the years since it was first introduced and now, Vantage Score 3.0 claims to be more predictive and able to score up to 30 million more people than FICO and other models by incorporating a broad set of date and looking at credit activity from the past two years. It also uses a new scale range from 300 to 850, which is better aligned with modern expectations. Finally, Vantage 3.0 does not factor in collections accounts that have been paid in full, allowing consumers to truly move forward after fixing past credit mistakes. A 2015 lawsuit settlement resulted in changes to consumer access to credit reports, as well as a few other consumer-friendly benefits. According to the settlement, credit bureaus must supply credit reports to consumers for free one time a year and one additional time within that same year if an error was reported. Changes also include improvement to the dispute process, extended time for dealing with medical debt, and changes to how medical debt is treated when an insurer is involved.