A History of Credit Scoring

By: John Ulzheimer
Date: March 22, 2019

The next time you turn on your television it’s very likely you’ll eventually encounter an infomercial or advertisement focused on credit scoring. And if you didn’t know any better, you might think credit scores have long been a part of our contemporary lexicon. Yeah, not so much.

There was a time barely two decades ago when very few people outside of the financial services community had ever heard of a credit score. If you weren’t a banker or a risk manager who worked for a credit card issuer, then you likely never had occasion to see a credit score, let alone your own credit scores. Over the past 20 years, however, the credit score has evolved and passed through three distinct and significant thresholds in the history of consumer credit.

For Lenders Only

Credit bureau based risk scoring systems, their formal title, have been commercially available since the late 1980s. They were initially used by credit card issuers but were quickly adopted by other types of lenders. The last holdout was the mortgage lending environment, but that too changed. In the mid-1990s, Fannie Mae and Freddie Mac informed mortgage brokers and lenders that they would have to begin using credit scores as part of the mortgage decision-making process.

It was at this point the consumer press began asking questions, in earnest, about credit scoring. And because credit scoring had never been used to any meaningful degree by mortgage brokers or lenders, they too started asking questions about credit scoring. As a result, credit scores landed on the radar of the consuming public. I personally made countless presentations to consumer groups, mortgage banker groups, mortgage broker groups, and any other groups that wanted to learn more about those mysterious three-digit numbers.

For Sale to Consumers

When the Internet started to become more commonly used by a critical mass of consumers, there were several companies that had the bright idea to sell credit reports and credit scores to consumers online. This happened around the turn of the century, give or take. The credit score had officially evolved from a tool used by lenders to assess risk to a product sold directly to consumers.

This “B2C” (Business To Consumer) distribution of credit-related products included the sale of credit reports, credit scores, and credit monitoring services. At this point, the scores being sold to consumers were largely of the “educational” variety, meaning they were not the same scores that were being sold to lenders. Educational scores are no longer the scores being provided to consumers online. They have long been replaced by actual ECOA compliant, commercially available scores, the same ones that lenders can use.

Free Credit Scores

Roughly 11 years ago, in 2008, the credit score began to evolve yet again. This time credit scores began to change into a free give-away to consumers who were willing to become a registered user of certain websites. Credit Karma, CreditSesame, and Quizzle were among the earliest websites to give away credit scores, and varying amounts of credit report data, to consumers who would sign up at their websites. Today the number of websites that give away credit scores is substantial.

Additionally, a growing number of banks and credit card issuers are willing to give away credit scores to their customers, normally as part of their monthly statements. In fact, at this point it’s very easy to find some method where you can see a number of your credit scores at no cost and, at worst, on a monthly basis.

From a risk assessment tool to a fee-based product sold to consumers to a free give-away, the credit score has evolved well beyond its original intended purpose, which was simply to help lenders assess the risk of doing business with borrowers. One final interesting nugget: the credit score hasn’t really changed in its stated purpose. It’s still primarily used by lenders and it’s still designed to predict risk accurately. And collectively, some 20+ billion scores are used every single year, a truly staggering number considering there are only about 220 million people who have a credit report.

Disclaimer: The views and opinions expressed in this article are those of the author John Ulzheimer and do not necessarily reflect the official policy or position of VantageScore Solutions, LLC.

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