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The History of Credit Scoring and How It Affects Consumers

Stephen Leifer - Tuesday, December 08, 2015

Credit scoring is a frustrating process for many consumers, especially when it interfere with their ability to live the life and borrow the money they desire.  Understanding a bit about how credit scoring began and how the system works can put your mind at ease and help you understand how to build a solid credit score.


Credit scoring began in the late 1950s.  The goal was to help department stores determine if they wanted to lend to consumers, but eventually the practice spread to commercial banks, credit card issuers, and finance companies.  Eventually, Freddie Mac and Fannie Mae, two government organizations affiliated with mortgage lending, adopted the practice of using credit scores for approving home mortgages.


Originally, credit scoring was not automated as it is now.  This occurred when two men named William Fair and Earl Isaac devised a computer system to help with reporting credit data.  The men created the Fair Isaac Corporation, which is where the term FICO score derives from.

 

There was a time when a person’s credit score was manually calculated by a bookkeeper and secret from the consumer.  In 2001, the decision was made to give consumers access to everything the credit bureaus reported that affected lending decisions, which included a person’s credit score.  FICO was reluctant at first to make the information public, but they soon realized they could make money by doing so and eventually relented.  Ultimately, they sold different versions of the FICO model to the three main credit bureaus, creating customized credit scoring systems for them.


It didn’t take long for the credit bureaus to realize they no longer wanted to pay FICO a royalty for the use of their algorithm., so they created their own model, released in March of 2006.  This new system, used by all three bureaus, created the Vantage Score. 


Regardless of what system is used to calculate your credit scores, it is the most important number associated with your ability to borrow money.  Awareness of your score and taking steps to improve it will pay off now and in the future.

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