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How Did Credit Scores First Get Calculated and How Are They Calculated Now?

How Did Credit Scores First Get Calculated and How Are They Calculated Now?

Nikolaus & Hohenadel, LLP Attorneys at Law recognizes that in today’s modern world, understanding things like your credit report or credit score can be very confusing.  Our firm works with both debtors and creditors and knowing creditors rights is one of our common areas of practice.  Working with an experienced credit attorney who has the knowledge to give you every advantage possible will set you up for success. 

Many people think your credit score says a lot about you.  Is it true?  Could your credit score have a direct correlation to the kind of person you are?  While this certainly isn’t always the case, having knowledge about your credit score and how it can affect things helps you be prepared for what may come.  Perhaps knowing where credit scores came from, can help us understand where they are now.

When many people think of credit scores, loans are usually the next thing that comes to mind.  That’s where the story of credit scores begins.  In the late 1700s, there was no such thing as a credit score.  There also was no such thing as consumer credit.  The majority of credit that was being applied for was in the form of loans and it was only being given out to businessmen.  Banks would approve loans for people like shop keepers or farmers based on subjective opinions.  There was no standardized system in place that would help a bank determine whether or not you were a risk to loan money to.  At times, they even depended on people vouching for an individual to approve them for a loan.  This also led to many discriminatory practices.

As the century turned and many years passed, a major shift in the economy took place.  As many stores and manufacturers were vying for American’s hard-earned dollars, consumer credit was born.  It wasn’t long before retailers and auto manufacturers began to extend lines of credit to consumers to buy their goods.  Many companies had internal bureaus that would track the spending and behavior of people they gave credit to.  These bureaus multiplied quickly, as businesses realized that there was money to be made from handing out credit to consumers and they became more “generous”.  Some scholars maintain that this was the beginnings of what later became The Great Depression. The bureaus that were created from retailers and the like were the early makings of what would later become Equifax, Experian and TransUnion. Evaluating whether or not someone was “worthy” of credit still was largely subjective however. Since this system was largely based on things that couldn’t be measured, it became obvious that something needed to change.

A more objective way to determine an individual’s credit worthiness was needed and there were several early iterations of creating a credit score.  Some creditors had internal ways of determining a score based on certain criteria.  Others hired outside companies to come up with a standardized and fair way to come up with a number.  Perhaps the most prominent one arose when two men, Bill Fair and Earl Isaac, started a credit scoring company called Fair Isaac Corporation.  Seem to ring a bell? 

Their system was based on 5 distinct criteria:

  • Payment History – How often someone would pay their credit bills on time, or late
  • Debt Burden – Determining someone’s debt to income ratio
  • Length of Credit History – How long someone has had a particular line of credit
  • Types of Credit – Whether your credit comes from credit cards, loans, mortgages etc.
  • Recent Credit Searches – How often you have a hard inquiry on your credit history

This system eventually became what is known as your FICO credit score.  This system is still in use largely today.  Your credit score can range anywhere between 300 and 850 points.  The higher your credit score, the more likely you are to be granted a loan, have a better interest rate on a credit card or even be approved for certain jobs.  While the 3 major credit bureaus use FICO, or a version of it tailored to their bureau, there are other scores that have been developed including VantageScore 4.0, Plus Score, Account Score 2.0 and CE Score.  FICO remains the most popular scoring system.

Your FICO score is made up from the 5 categories listed above, 35% coming from payment history, 30% coming from debt burden, 15% coming from length of credit, 10% coming from types of credit and 10% coming from recent credit searches.  Your score can vary depending on whether you have bankruptcy, foreclosures, an uneven debt to income ratio, a credit history that isn’t very long, not enough types of credit on your history or too many hard inquiries.

Working with a credit attorney from Nikolaus & Hohenadel, LLP Attorneys at Law can help solve some mysteries with your credit, or help secure payments from debtors if you’re a creditor with our vast knowledge about creditors rights.  Anyone who wants more information should feel free to contact us online.  We work with clients in Lancaster, Columbia, Elizabethtown, Strasburg and Quarryville, and surrounding areas.  Schedule an appointment with us today, so we can determine how to best serve you!