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Keeping Score

When did credit scores start?

Credit scoring is now commonplace, but it's a relatively new way to calculate a borrower's risk

Summary

The first FICO credit score based on credit bureau data came out in 1989, and it quickly became the preferred method for calculating risk. Here’s how that has impacted the lending industry.

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Let’s talk this week about credit scores – their start, their importance, key credit scoring factors and what the future holds for credit scores. Here goes!

A brief history of credit scores

Way back in 1956 Bill Fair and Earl Isaac formed a company to predict human behavior. In 1958 with advances in computer technology the duo introduced their first scoring system. Fast forward to 1989, when Fair, Isaac, and Company introduced the first FICO scores based on the information from the three credit bureaus, Equifax, Experian and TransUnion. The bureaus themselves began forming in the 1800s, even though the concept of credit had been around for thousands of years before that.

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This marked the first time something other than personal knowledge of the buyer was the criteria used to determine if credit would be granted. As hard as it is to consider now, getting a loan used to be an extremely subjective proposition. And who you knew or what you looked like could determine whether you got a loan and what your terms looked like.

While the Equal Credit Opportunity Act made it illegal to base a lending decision on someone’s race, sex, religion or marital status, among other identifying characteristics, the advent of the FICO score helped usher in a new, more objective, model for credit scoring, based on an individual’s lending history.

See related: Sexism in the credit industry? Here’s why it could happen

VantageScore made its debut in 2006, a result of the three bureaus banding together to create their own scoring matrix to compete with FICO. Both are widely used today, but FICO scores remain the preeminent credit score used by the most lenders. However, both are valid measures that help creditors determine a consumer’s likelihood of repaying debt or defaulting. Since creditors are in business to make money, using a predictive score to control losses only makes good sense. This is why today’s lending decisions nearly always rely at least partly on credit scores.

When did credit scores become important?

The FICO score became influential in credit decisions in fairly short order after its debut. By 1991 all three credit bureaus began selling FICO scores to lenders. This change marked a transformation in the way loans were originated. With real data to back up their decisions, it’s become easier for lenders to make objective decisions – not subjective ones – which hopefully cuts down on discrimination in lending.

What are the key credit scoring factors?

Here is a brief refresher. Both FICO and VantageScore have a range of 300 to 850, with 300 currently being the lowest possible score and 850 being the highest. The scoring factors for FICO break out this way: payment history is No. 1 in importance and accounts for 35% of the overall score. Next up is credit utilization, or how much of your total credit you have used, at 30%. Length of credit history, or how long you have had your accounts makes up the next 15%. Finally, credit mix – the types of credit you have – and new credit are worth 10% each.

VantageScore is calculated using the same basic information. However, the importance of each factor is weighted differently and without a percentage attached. Instead, VantageScore uses an “influential” scale like this: total credit usage, balances and available credit are all “extremely” influential; up next and called “highly” influential are credit mix and experience; payment history comes in as “moderately” influential, as are credit history and new accounts.

Each scorer sells their products into the credit granting marketplace and periodically makes updates or improvements to their products. FICO is up to version 10 and 10T and VantageScore is up to version 4.0. Lenders may or may not buy an updated version if the current one is performing well. The result to consumers is that scores may vary depending on the version in use by the lender when applying for a loan or credit card. Generally speaking, a good credit profile (report) will score similarly, but not exactly, regardless of the version used.

A key difference between FICO and VantageScore is that FICO’s scores are generated using only one credit bureau report. This means you could have three different FICO scores, depending on which credit bureau report is used to generate the score. But VantageScore uses all three bureaus to generate one score.

Also, while the range of scores is the same across both platforms – from 300 to 850 – there are small differences in how each range is classified. According to myFICO.com, any score less than 580 is considered poor, 580 to 669 is fair, 670 to 739 is good, 740 to 799 is very good and any score 800 or higher is exceptional.

According to Experian, VantageScores in the 300 to 499 range are very poor, 500 to 600 is poor, 601 to 660 is fair, 661 to 780 is good, and 781 to 850 is excellent.

Both agree that you want your score to be at least in the upper 600s or better.

What is the future of credit scores?

Both FICO and VantageScore have been updated several times. New scoring supplements have begun to appear on the scoring scene that use data not contained in a credit report. Both Experian Boost and UltraFICO, for example, use consumer-supplied banking and other data to enhance scores. These programs look at what is known as “alternative data” to help determine scores.

Another innovation is the use of trended data. VantageScore was the first to use trended data, which looks at the trends of several months of consumer spending and payments to more quickly and accurately identify improving consumer behavior. FICO has recently come on board with the use of trended data in its 10T version, which looks at 24 months of a consumer’s payment and debt history in its score generation.

Credit scoring is not going away but is an ever-evolving process. Still, the tried-and-true advice of paying your bills on time every time will always be of benefit to you and your score. Not to mention your overall financial health!

Remember to keep track of your score!

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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