As the banking world is constantly evolving, you will never be able to build your own house, own a car or get a loan, if you aren’t having a good credit score. But what did the world before credit scores look like? How did the concept of credit score emerge and who were the forerunners of credit bureau risk score? Here is a deeper insight into when were credit scores invented and who introduced this concept.
Life Before Credit Scores Were Invented
In the modern banking world, a credit score is defined as a credit bureau-based scoring system that determines the creditworthiness of an individual. Before giving people a loan, companies evaluate your credit card scores to determine whether or not it would be a safe investment deal with you. Based on your credit score, the lending company will also determine the interest rate for financing.
The credit scores system that currently works, comes under two models, the first model is FICOSCORE, followed by VantageScore.
These credit scoring systems assess the risk of lending money to an individual based on the information attained from their credit reports. Both the models make credit inquiries using a 45-day span and 14-day-span respectively.
Well, this is how the concept of credit score works in today’s world, but some decades earlier the concept of credit scores didn’t exist. Due to the absence of such valuable money lending tools, it was quite difficult for people to qualify for a loan.
Another matter of concern before the emergence of credit scores was, people would often be denied for unknown reasons. However, the process of applying and getting finances also was quite sluggish because the process of assessing risk was manual.
According to the banking experts, the ancient lending methods were so unreasonable that they would deny a loan to a person who had the capacity to return the loan along with the interest as compared to a person the company had found eligible for financing.
So, before these credit assessment tools existed, the ancient banks lacked the predictive insights to make good decisions.
When Were Credit Scores Invented?
The idea of credit scores emerged in the year 1958 when FICO was founded by Bill Fair and Earl Isaac. In its early stages, the company was known as Fair Isaac Corporation, however, now it is known as FICO.
Considering the banking tools and challenges faced by the money lenders, Fair and Isaac thought of a data technique that would help businesses in making smarter money lending decisions. The founders of FICO contributed $400 each to develop this data system.
Following their efforts, FICO started its operations in the year 1958. This company is the inventor of a credit card scoring system that is used by lenders in the USA to date.
The company later partnered with Equifax to come up with the first credit bureau-based score in the year 1989. Within three years of the credit bureau-based score emergence, FICO’s credit bureau scores were made available from all the three major credit bureaus of the time.
The FICO credit score remains between 300 and 850. If the score range of your credit is on the lower limit, it means you are less likely to pay back your credit obligations timely. On the flip side, if you have a good credit score (i.e. in the high end) you are most likely to fulfill your credit obligations in a timely manner.
The FICO Company achieved a milestone in the mid-90s when FICO was recommended for mortgage lending by Fannie Mae and Freddie Mac. Following this development, FICO credit scores are used to finance mortgages, credit cards, and even personal loans.
When Was VantageScore Credit Score Introduced?
Until 2006, the only credit scoring model used by financing companies was FICO, however, the three major credit reporting agencies came together to form VantageScore Solutions.
Following the formation of VantageScore Solutions, lenders have now two options to assess the credit risk of individuals.
Just like the FICO model, the VantageScore model also provides a scale from 300 to 850 and determines the credibility based on where the persons who require financing stand.
The first two versions of VantageScore functioned on the scale extending from 501 to 990, however, it later updated its models and they function at similar scales to FICO’s model.
After the year 2007, both the credit scoring models grew in popularity and it has multiplied over time. As of now, thousands of lenders use the models to make safe deals.
According to some financial experts, the VantageScore model is more applicable in educational setups however this doesn’t stand true. The model’s market penetration has proved that is not just meant for determining an educational score.
Another benefit that VantageScore has provided is, it has enabled the consumers to determine their credit scores for free. Before this scoring system, there was not a single way for customers to analyze their credit score as most credit assessment models were available for lenders only. Customers had to buy the tools in order to assess their scores.
The scoring tools that were made available for consumers on the websites for free were actually distributed by VantageScore Solutions. This vast distribution of credit assessing tools enabled credit card users to determine where they stand in terms of their credit card scores.
These widely used credit scoring models have now given commercial borrowers a financial identity and ease. It has also helped the consumers earn and maintain the best scores possible. Also, attaining competitive financial offers is also made possible following these credit scoring options.
Ways To Earn A Good Credit Score
There is not any simple trick for credit management, but there surely are some rules of thumb that can help you retain a good score. Some of these most effective rules are provided below.
1. Keep An Eye On Your Credit Card Utilization
Utilizing your credit card blindly can land you in big trouble. Thus, it is crucial to keep a check on how you are treating your credit card. If your credit card utilization is climbing, you are about to hurt your credit score.
2. Don’t Delay Your Bills
Another bad financial habit that can hurt your score is paying bills after their due date. The riskiest thing about delaying your bills is, you won’t be able to improve your score quickly. So, make sure you are coping with all the due dates.
3. Check Your Score
Although most credit card users are applicable to check free credit score once a year but if you acquired any loan recently, you must check your score to find whether or not it has changed and if has changed check how much.
If you find any errors, report them to your credit bureau at your earliest convenience so that they can be rectified immediately.
4. Never Underestimate The Credit Risk Factors
Understand the risk factor that most lenders assess to find your creditworthiness. Some of these factors include:
- The types of credits you are currently using.
- The amount that you own.
- How long it has taken for you to return the previous loan
- Any new credits
- The length of your credit history.
Make sure you are considering all the above factors so that you can retain a good score.
Related: Your Perfect Credit Score – Determined By 3 Best Credit Bureaus
The Takeaway
Although credit scoring models have created ease for us in making financial decisions, it is crucial to understand how the credit scoring models actually work so that you can easily retain a good credit score.
