Sometimes we get so bogged down by the specifics of our credit scores that the score itself feels like something we have never been without. Questioning why we have credit scores becomes as strange as asking why the sun rises each morning or why the Cubs haven't won the World Series. To many, it's a simple fact of life.
That's not quite the case, though. The Fair Credit Reporting Act, which first sought to regulate the reporting of credit information, was only passed through Congress in 1970. Furthermore, the FICO score as we know it today wasn't introduced until 1989. Credit scores are a lot newer than sunrises, not to even mention the Cubs championship drought.
Of course, the concept of creditworthiness dates much further back than the late 1900s. For as long as there have been lenders, there has been the need to assess risk. While lending money with interest has been discouraged and even outlawed at times, it has been possible to borrow money at interest for as long as the concept of money has existed. Before modern banking institutions were established, individual lenders were your best option if you were looking to borrow money. Moneylending at that time was much less organized, and lenders were forced to judge risk without the help of organized reporting or systematic credit scoring.
According to PBS, modern credit reporting was born around the turn of the twentieth century, when small merchants shared financial information with each other regarding mutual customers. Equifax, then known as the "Retail Credit Company," was the first company to emerge with the mission of collecting credit information in mind. The company was founded by grocer Cator Woolford, who looked to sell information regarding customers to other business owners in Chattanooga. Following Woolford's innovation, credit reporting gradually became a bigger industry, leading up to TransUnion's founding in the late 1960s.
Though TransUnion and Equifax were both doing business in the late 1960s, it wasn't until Congress passed the Fair Credit Reporting Act in 1970 that the system began to look like it does now. At that time, credit bureaus had been known to collect irrelevant personal information about consumers, including details like drinking habits, personal conduct and political activities. Before the FCRA, consumers were not even allowed access to their reports, and rumors of misinformation resulted in increasing amounts of distrust. With the establishment of the Fair Credit Reporting Act, many of these shortcomings were finally addressed, as consumers were legally guaranteed access to their credit information, a legal system to fix errors was established and the type of information that credit bureaus could report was more carefully defined.
When it comes to credit reporting, the credit score is our most recent breakthrough. Fair Isaac Corporation first sought to sell computerized credit scores to individual businesses in the 1950s. The major credit bureaus eventually followed suit, but it wasn't until 1987 that the FICO score became publically available to lenders. Even then, scores were still not available to consumers. This eventually changed with the Fair and Accurate Credit Transactions Act, a 2003 amendment to the original Fair Credit Reporting Act, which allowed consumers to obtain a free credit report from each bureau once every year, as well as requiring that credit bureaus provide individuals with a copy of their credit score at a "fair and reasonable" fee. With the establishment of services such as Credit Karma a few years later, credit scores, in addition to important report information, were finally brought to consumers free of charge.
So There You Have It
While the system may still seem a little mysterious today, the whole process has come a long way. The regulation of the credit report industry has sought to ensure consumers have fair access to their information and fair recourse to misinformation, and the modern credit score has allowed lenders a simple first step in evaluating potential borrowers. Nowadays, Credit Karma is looking to claim its spot in the history of credit scores, helping users access entirely free credit scores and useful educational tools. Log into Credit Karma today to take a look for yourself!
About the Author: Mike Goldstein is a Content Writer at Credit Karma. Since joining the team in June 2013, he's been delivering the financial know-how on the daily. When away from work, you can find Mike watching hockey, Twittering for hours and frequenting trivia nights.
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