Good credit is necessary for any major purchases and investments, such as cars and homes, and credit repair services are part of a financial specialty that was created to help individuals struggling with their credit.
With the increase in people taking out loans and credit cards to fund their housing, education, and other expenses, understanding credit is all the more important. It can be difficult to know how to get an apartment with bad credit or apply for loans.
Let’s get started on building your financial literacy with the history of credit reporting.
An Overview of the History of Credit Reporting
The credit scores we know today only came about a few decades ago. However, credit reporting has been around for nearly 200 years. Credit reporting is part of a history of lenders and merchants collecting data and using it to determine the level of confidence in a borrower’s ability to repay a loan in full and on time. Since it began, it has evolved into the more complex system we know today.
Mercantile Agency, 1841
The Mercantile Agency was one of the first commercial credit reporting agencies. They hired correspondents to collect information about lenders and borrowers, including a borrower’s:
- Age
- Credit history
- Marital status
- Ethnicity
This form of credit reporting was not centralized like it is today. In the late nineteenth century, as department stores and mass retailers increased in popularity, consumer credit reporting did too. It was up to lenders to conduct credit checks and refer to local credit bureaus in order to approve installment loans for their customers.
A major shortfall to this system was lenders could discriminate against certain people based on demographics without answering to a nationalized standard for lending.
Computerized Credit Reporting–1960s
By the time the 1960s came along, the United States was home to more than 2,000 credit bureaus. Over the next fifty years, that number would consolidate to three. The rise of computer technology pushed bureaus to digitize their data from physical files to digital ones accessible from locations around the country.
Despite technological advances, lenders were hesitant to lean into social modernization. Lenders hesitated to surrender their use of subjective character assessments to evaluate someone’s creditworthiness. However, this made lenders vulnerable to accusations of unfair discrimination.
By the 1970s, Congress passed a series of consumer protection laws—including the Fair Credit Reporting Act and Equal Credit Opportunity Act—in response to criticisms about discriminatory lending and credit reporting practices.
Rise of FICO Scores–1989
By 1989, the Fair Isaac Corporation (FICO) had developed credit scoring models that were specific to each company. Soon, they partnered with nationally-established credit bureaus to create a scoring system that could evaluate all consumers. BEACON was the first generalizable credit score that helped credit scoring become more accessible.
These scores were known as FICO scores and were critical in financial decision-making because they were a requirement for mortgage applicants in the 1990s.
Around this time, credit bureaus also consolidated into the three national bureaus we have today: Experian, Equifax, and TransUnion.
What Credit Looks Like Today
There are still numerous scoring systems, but the FICO system is the most widely used by lenders today. The scoring model has adapted to changes in consumer behavior, allowing scores to range from 300 to 850. The higher the score, the more likely the consumer will pay back the loans in full and on time.
Modern scoring systems no longer take into account a borrower’s race, age, gender, or marital status. In fact, scoring systems have adapted to help borrowers repair their credit more easily than before. In addition to credit repair and hard inquiry removal services, scores are calculated on these five factors:
- Payment history: if you pay past credit accounts on time
- Amounts owed: the total amount of credit and loans you use compared to your credit limit
- Length of credit history: how long you’ve had credit
- New credit: how often you apply for or open new accounts
- Credit mix: credit cards, installment loans, mortgage loans, and more
There has been an effort to include information that isn’t traditionally used to calculate credit scores, such as recurring payments (utility bills, monthly subscriptions) and other types of accounts.
In Conclusion
Credit and credit scores can be confusing, especially to groups who were historically subject to discriminatory financial practices and denied access to credit. When specific demographics are excluded from a system and then pushed into it out of necessity, there will be gaps in financial literacy.
If you find yourself struggling to understand credit, you aren’t alone–the experts at The Phenix Group specialize in credit law and financial literacy and are passionate about helping individuals repair their credit. If you need credit repair services or are looking to expand your credit knowledge, book an appointment today. Don’t let credit get in the way of embracing your future!