A Brief History of Credit Reporting
By Tiffany Sorensen
Your credit score is a three-digit figure that ranges from approximately 300 to 850. In summary, it is a numeric representation of your creditworthiness. You may wonder why and when we started using credit scores as we know them today. Let’s take a look at how we arrived at our current credit reporting system.
Usury in the Olden Days
Usury is the lending of money for interest, a practice that has been condemned in countless circles. In fact, usury is described as an abomination in both the Bible and the Quran. Ancient peoples, including the Babylonians, the Greeks, and the Romans, passed laws to establish a maximum interest rate. During the Middle Ages, usurers faced crippling fines and could be excommunicated by the Catholic Church. This fervently negative attitude toward usury continued into the eighteenth century. It was at this time that the original American colonies implemented a general usury.
The First Credit Files
Early creditors did not lend money to just anyone (and neither do creditors nowadays). They first had to evaluate the likelihood of being paid back by each debtor. This need to assess candidates’ financial profiles prompted the formation of precursory credit reporting systems.
The details of early credit reporting procedures are shrouded in mystery. However, it is believed that the first credit files were compiled sometime in the 1800s. Individuals would travel from town to town interviewing merchants about clients who bought on credit. Merchants, in turn, would provide information about who paid his/her dues in a timely manner and who defaulted. This data was handwritten and kept by an individual whom merchants would contact before giving goods on credit.
The Need for an Efficient System
In ancient times, the world population was much smaller. There was limited contact between distant communities. The majority of townspeople knew each other, so judging a person’s creditworthiness was an easy task. And if someone owed you money, you could go to his/her home to ask for it.
But society is different now. Earth’s population has increased by more than one billion since the year 1999. We rely heavily on manufactured goods and the Internet. We have cars, houses, vacations, and tuition to finance.
Because of the immense transformation the world has undergone, old credit reporting procedures became obsolete. Creditors required a more reliable and comprehensive way to document consumers’ credit history.
In the 1960s, credit reporting went digital thanks to the advent of the computer. Computerization allowed for the storage and organization of consumer data on an astronomical scale. It also reduced the possibility of errors and lost information.
In 1970, the Fair Credit Reporting Act was passed. This legislation was essentially the first law that regulated credit reporting in the U.S. It was not until the 1980s, however, that credit scores gained popularity. At that time, credit scores were calculated using a points system. Lenders would add or deduct points for different factors, such as debt amount and payment history. This system was often subject to lenders’ whim and therefore was not entirely fair.
Since the 1970s, credit reporting has become more effective and unbiased. Calculating a person’s credit score is anything but a straightforward process. It involves algebra with many variables, percentages, and a little psychology. However, statistical models and computer programs have made the job easier than ever. Credit reporting used to be a matter of human judgment, but now it’s all in the math.
Now you have an understanding of why we use the present credit reporting system. We’ve certainly come a long way since the days of Babylon!