County Credit

Credit Scoring History

Tue, 14 Apr 2015

Credit scoring first started in the late 1950’s to support lending decisions in large department stores. The concept was revolutionary and by the end of the 1970s, most of the nation’s largest commercial banks, finance companies, and credit card issuers used credit-scoring.  However, credit scoring was widely adopted when Fannie Mae and Freddie Mac fully endorsed the use of the FICO score for home mortgage lending.

 

Credit scoring is now an automated process. but it hasn’t always been that way. Before the advent of computers, a person’s credit score was manually calculated by a bookkeeper. Such judgmental decision making is time consuming, costly, and subject to irregularity because different bookkeepers may weigh factors differently.

 

In 1956, two bright chaps named William Fair and Earl Isaac, identified this problem and started the Fair Isaac Corporation (FICO). Their mission was to use computers and mathematics to generate credit scores from credit report data. The mathematics was to look at historic data (consumers’ past payments) and predict future behavior in the form of a number. The FICO score was launched. Fair Isaac is now a large corporation traded on the New York Stock Exchange (NYSE: FI).

 

From the 1950’s through the 1990’s (some fifty years), consumers could not even have access to their credit scores. Luckily the free thinkers of California changed that for everyone. In 2001, the State of California ruled that residents were allowed to know everything the credit bureaus were reporting, including their credit score. Fair Isaac and the Credit Bureaus decided they might as well make the data public to all consumers in the U.S, instead of trying to block it from everyone but Californians.

 

At first, FICO was hesitant, but soon they realized they would be floating in money by selling credit scores. They immediately launched MyFico.com, and hired the opinionated Suze Orman as their spokesperson to spread the word.

 

In 2001, the credit bureaus wanted a piece of credit scoring pie, so FICO decided to sell each credit bureau their own version of the FICO model. That’s right…customized FICOs!  Each credit reporting agency had its own FICO:

 

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This was fine and dandy, but the credit bureaus did not like paying money to FICO, so they started planning their own credit scoring model. The new product was announced by the three bureaus on March 14, 2006.

 

In an effort to cut out FICO, the three credit bureaus teamed up with each other to create their own product, Vantage Score. It is essentially a way for the three bureaus to eliminate the current dominant player in credit scores (Fair Isaac with their "FICO Score"). Fair Isaac, the original creator of the FICO Score, was not involved with the creation of Vantage Score's new formula.

 

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