If you know what a FICO score is then you may have wondered how credit scoring came into being. How did that one little number become so important in our lives?
Lenders have been using credit scoring for years. By the end of the 1970’s, most major lenders used some kind of credit-scoring formulas to decide whether or not to accept or reject applications.
Credit scoring was introduced by two pioneers in the field: an engineer Bill Fair and mathematician Earl Isaac. Together they founded the firm Fair Isaac in 1956. Over the years they convinced lenders that mathematical formulas could do a better job predicting whether an applicant would default than even the most experienced loan officers.
By relying on formulas it would eliminate the possibility of human bias. Formulas wouldn’t turn down a potentially good credit risk because an applicant was the “wrong” race, religion or gender. It wouldn’t accept an applicant because they were a friend.
Credit scoring was also fast. Because of fast computers it would take minutes rather than days or weeks.
Early on, each company had their own credi scoring formula tailored to the amount of risk it wanted to take. Also the history with various types of borrowers, and the kind of people it attracted as customers. Although the factors varied, it took into account the applicant’s income, occupation, length of time with employer, length of time at address and information regarding accounts listed on the credit report. These calculations took place behind the scenes, invisible to the consumer and understood by a small amount of experts and loan executives.
Being that qualifying for an auto loan may be considered and weighed differently, that led to credit scores that are based on the biggest lending databases of all-those that are held at the major credit reporting agencies, Equifax, TransUnion and Experian. Fair Isaac developed the first credit bureau-based scoring system in the mid 1980’s, and the plan quickly caught on.
Instead of basing their calculations on any single lender’s experience, this type of scoring factored in the behavior of literally millions of borrowers. The score was based on consumer’s history of paying bills, the number of types of accounts, and how much available credit customer was using, and other factors.
The credit-scoring model was useful for more than just accepting or rejecting applicants. Some lenders decided to accept higher-risk applicants but to charge them more in interest and possible fees. Lenders also use scores to screen vast numbers of people to find potential future customers. Instead of waiting on people to apply, lenders could send out reams of preapproved offers to likely prospects.
Consumer credit exploded in the 1990’s. Lenders felt more confident about making loans to wider groups of people. Here are a few examples of how available credit expanded during this time:
- The total volume of consumer loans – credit cards, auto loans, and other non mortgage debt more than doubled between 1990 and 2000, to $1.7 trillion.
- The amount of credit card debt outstanding rose nearly three-fold between 1990 and 2002, from $173 billion to $661 billion.
- Home equity lending soared from $261 billion in 1993 to more than $1 trillion 10 years later.
Credit scoring got a huge boost in 1995 when the country’s two biggest mortgage-finance agencies, Fannie Mae and Frddie Mac, recommended lenders use FICO credit scores. Because Fannie Mae and Feddie Mac purchased more than two-thirds of the mortgages made, their recommendations carried enormous weight in the home loan industry.
Consumers may not understand the credit scoring system and find it to be a giant maze of never ending information, but at ReScore Solutions, Gale Kirkpatrick understands it as much as it can be understood. They work with each client to get credit reports lender-ready. That means that when clients follow the “plan”, clients will be approved. Home ownership is possible, even starting with the worst credit scores.
Most clients begin with scores in the 400’s and 500’s. Knowing the correct steps to take is the secret ingredient. They are experienced in debt negotiations, which saves clients hundreds to thousands of dollars. Through debt validation thousands of dollars can be saved on having 3rd party debt collections removed from credit reports- forever.
If you need help with credit repair or student loan debt contact them today. ReScore also provides debt relief from credit card and unsecured loans. Business owner? ReScore offers business credit building and funding for your business.
Credit report evaluations are absolutely free.
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credits: Your Credit Score Liz Pulliam Weston 2005 5th Printing