How Did Credit Scoring Come About?

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Credit scoring was invented by the Fair Isaac Corporation in 1958 to provide a quick, data-driven method for determining the credit worthiness of an individual or corporation. This innovation was only possible with the development of the computer and modern communications technology. As the technology and business model has advanced, credit scoring has become integral to the proper functioning of the consumer economy.


The Fair Isaac Corporation was founded in 1956 in order to provide solutions to businesses using mathematics and computer technology. At the time, a typical computer was large enough to fill a room, and nothing like credit scoring had yet been invented. Credit cards had been in use since the 1920s in various forms, with the first cards capable of being used at multiple merchants first coming into being in 1950.


Credit scoring was developed as a method for predicting consumer behavior based on sophisticated statistical models. In short, it compares one credit user's behavior to statistical averages in order to predict whether they will be a good candidate for an extension of credit. These statistical models only improve in overall accuracy as more people enter the system. This was difficult to accomplish in the early period of the history of credit scoring.


Throughout the 1960s, Fair Isaac sought to sell their credit scoring system to individual lenders--banks, department stores, credit card companies and others. They essentially had to use direct sales tactics, as the technology was so new and computers so relatively rare that it was difficult for them to gain significant market penetration for years. In the earlier days of credit, most revolving credit accounts were given out by department stores to allow people to finance large purchases.


In 1972, Fair Isaac developed the first automated credit processing system and implemented it for use by the Wells Fargo Bank. This development made it possible for companies to extend credit safely and efficiently to as many consumers as possible, which further helped to make the use of credit cards nearly universal. In 1979, the company developed the numerical credit scoring system--FICO--that is so commonly used today. While it was not the first automated credit scoring system, it grew rapidly to become the market leader, boosted in the mid-1990s by the endorsement of FICO by Fannie May and Freddie Mac.


Automated credit scoring has made it simple for credit bureaus of all kinds to increase the availability of credit dramatically thanks to the simple, automated system that currently underpins the consumer economy. As the economy has changed, so has the credit scoring system. It adjusts dynamically to changes in consumer behavior. In 2001, Equifax and Fair Isaac were the first credit report companies to allow consumers to access their own reports directly, with most of the major competitors following suit within the next two years. This helped consumers to learn more about how lenders viewed them as credit risks and to work to improve their score.