When Were Credit Scores Invented

Table of Contents

• History of Credit Scoring
• How Credit Scores Were Invented
• How Credit Scores Evolved
• Credit Scoring Today
• Credit Scoring Models
• Credit Score Factors
• Average Credit Score
• Finexos & Lenders

We’ve put together a quick history of credit scores, as well as how they evolved and how they work. Stick with us to learn more or, to find out how Finexos is helping to revolutionise the world of credit scoring,book a free consultation now. 

A History of Credit Scoring 

Credit scoring has its roots in the American credit bureaus of the 19^th century and has evolved into a global practice that influences the world of modern capitalism. 

How Credit Scores Were Invented 

So, when were credit scores invented? Credit scoring as we know it today evolved from the work of the Mercantile Agency, founded in New York City in 1841. The Agency would send correspondents across the US to collect information about businessmen including their race, age, marital status and credit history. This information was used primarily in business-related financial decisions and wasn’t yet a consumer-focussed practice. Needless to say, these methods were founded in the biases and opinions of the time and were far from objective or fair. 

How Credit Scores Evolved 

Towards the end of the 19^th century, the growth of department stores and mass retail in the US saw the emergence of consumer instalment loans, much like the ‘pay in three’ type plans still in use today. The department stores and mass retail outlets needed a way to evaluate individual consumers for their creditworthiness to ensure they’d get their money back.

This need gave rise to the spread of local credit bureaus across the US. Stores would collect information about their customers and submit it to their local bureau for decision-making. From the late 1800s to the early 1960s, more than 2,000 credit bureaus emerged across the US.

However, the 1960s saw the emergence of computer technology, and credit records began to be digitised and centralised. Over the next 20 years, larger bureaus started going town to town, buying up the smaller local bureaus and consolidating their consumer credit files. By the 1980s, there were only five bureaus left, which would then shrink further to three in the coming years. 

Credit Scoring Today 

In the US today, the most popular method of credit scoring is the FICO system, developed by the FICO company in collaboration with the national credit bureaus in 1989. This new standardised method made credit scoring much more accessible to a wider number of lenders and by the mid-1990s it was becoming engrained into more and more financial decisions, primarily mortgage applications.

While the UK has adopted some of these practices, and consumers are assigned a credit score in a similar way, the methods to assess an individual for creditworthiness are far more varied. Individual lenders use their own internal calculations to make decisions, with the most popular method being a statistical model known as logistic regression. This is an algorithm that uses inputs including income, savings and credit score to predict a binary outcome; either a customer is likely to default on their loan or not.

While these individual practices vary, the world of credit in the UK is tightly regulated by the Financial Conduct Authority and consumers can report any unfair decisions to the Financial Ombudsman Service. 

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What Are The Credit Scoring Models? 

Now that we’ve answered the question ‘when were credit scores invented?’, let’s look at the different scoring models. In the UK, there is no universal credit score. There are three primary credit reference agencies: Experian, Equifax and TransUnion. Each uses a slightly different model to assign credit scores and not all lenders will report to all agencies, meaning scores can vary from agency to agency.

The score ranges of each agency and what they consider to be the minimum for a ‘good’ score are broken down in the table below.

The better your score, the more financial products you’ll be eligible for, the higher your borrowing limits will be and the lower your interest rates are likely to be. The process for calculating business credit scores is very similar, and takes into account the longevity of your business, financial history and credit use. 

How Are They Used? 

Credit scores are used as a key component in credit application decisions. Lenders will consider your credit score along with other factors when evaluating you as a potential customer.

Scores are also often monitored by your lenders on an ongoing basis to determine your continued financial stability and help spot any warning signs of distress or impending difficulties. The main uses of credit scores in the UK include:

• Setting interest rates
• Determining credit limits
• Loan and credit card applications
• Service provider decisions (mobile phones, utilities etc.) 

Factors Affecting Credit Scores 

When calculating your credit score, reference agencies collate a range of information about you, including:

• Financial history – your existing credit use, debt, mortgages, vehicle finance
  Credit applications – previous credit applications, including any that were unsuccessful
• Negative events – whether you’ve ever defaulted on loans, missed payments or become overdrawn on bank accounts
• Address history – your current and former addresses
• Public records – your electoral roll registration, past insolvencies, bankruptcies or county court judgements
• Financial associates – anyone you are financially connected to, such as through a mortgage or joint bank account 

What is an Average Credit Score?

Giving an average credit score for the UK is a little complicated because of the lack of a centralised scoring system. Scores will vary for each person depending on which credit reference agency you ask. However, we’ve put together some broad figures from different agencies below.

Average score by agency:

Average scores can also vary by age, as older people have had longer to amass their score and demonstrate financial responsibility. According to Equifax, the rough average scores for each age bracket are:

Overview  

So, hopefully we’ve answered the question ‘when were credit scores invented?’ and provided some background information about how they evolved as well as how they’re used.
Modern credit scoring systems have changed a lot since the first credit bureaus in the 1840s, but the basic principle is still the same. However, the continuing evolution of digital technology and AI is fuelling progress and helping advance how scores are calculated. For more information, see our guide on AI in credit scoring. 

How Finexos is Helping Lenders 

Today, credit scores hold a lot of sway over people’s lives, and a poor score or lack of history can hold people back, barring them from accessing crucial products such as mortgages and vehicle finance. The way these scores are calculated is quite rigid, and founded on fixed evaluations of a person’s profile, ignoring a range of information that could provide more valuable insight into their creditworthiness.
At Finexos, we’re helping lenders to leverage AI to help them make finance more accessible to more people, combatting credit poverty. At the same time, we’re enabling them to make smarter lending decisions, reduce default rates and improve profitability.

To learn more about how our trained AI can help you improve your lending practices, book a free consultation with our team today.