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Today, credit scores and reports are a common part of life. In fact, most consumers are just beginning to understand how their credit reports – a tool developed more than 100 years ago – can affect their ability to get a loan or buy a home. But did you know that a consumer’s ability to review credit reports is a relatively new phenomenon? In fact, it wasn’t until 2001 that consumers were able to view their credit scores. Here’s a little history of the credit report and credit-scoring system:
Where it all started
Before we had credit scores and credit bureaus such as Equifax and TransUnion, there were credit reports. More than 100 years ago, small retailers shared information about their customers. This give-and-take soon developed into credit bureaus, which then became much larger and thorough thanks to computers. As computerization became more common, these credit bureaus began sharing more and more information, including personal data about consumers such as personal habits or potentially negative information. From this, they began developing scores that rated individuals. But because consumers could not verify the information or see the reports, they were at risk for discrimination or other problems related to credit.
Protection for consumers
In 1971, Congress had to pass the Fair Credit Reporting Act (FCRA) to allow consumers to view their credit reports and correct any errors contained in them. Most experts also say that the credit-scoring system has made the U.S. financial system much more nimble and open to a broader section of the population. Simply put, credit scores give you a better chance of getting a loan than you previously would have.
The industry standard for credit scores is the FICO score, which stands for Fair Isaac Corporation, the company that developed the scoring system. The type of score we see today was developed by FICO in 1989. In this scoring system, consumers receive points for various factors that will predict the likelihood that they will repay their debts in a timely fashion. Basically, the score tells banks and other lenders how big of a risk you are. The three-digit score is between 300 and 850 – the higher the score, the better your creditworthiness, and the lower the interest rates you will receive for loans.
Credit scores and you
In 2001, consumers were given access directly to their credit scores. This came as the result of many lending institutions wanting to disclose consumers their scores. By 2003, an updated version of the FCRA was passed that requires credit agencies to provide consumers with their credit scores for a “fair and reasonable” fee.
Obviously, you want to have a high credit score. But how high? Generally speaking, scores above 700 are considered good – above 770 and you’re “excellent.” If your score is in the mid-600s or lower, you will be considered a higher credit risk. If you apply for credit with a mid-600 score, you may encounter more trouble getting a loan, and the interest rates will be higher.
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