Where Did Credit Scores Come From?

If you’ve ever applied for a credit card or loan, you’re probably aware that your credit score was used in the application review process. But that wasn’t always the case. Lenders started using credit scores for consumer loan products in the 1980s, but the roots of credit scoring came decades earlier.

In 1941, the National Bureau of Economic Research published a study by MIT management professor David Durand on reports of good and bad consumer installment loans. He analyzed how certain variables correlated to the outcome of the loans, developing an “efficiency index” that helped translate those variables into risk assessments, according to the book “Readings in Credit Scoring: Foundations, Developments, and Aims,” co-authored by Lyn C. Thomas., David B. Edelman and Jonathan N. Crook.

Durand’s statistical approach to lending decisions didn’t take off right away, but the analytics company that generates the most widely used credit scores today, Fair Isaac Corp. (FICO), was created nine years later by Stanford University researchers Bill Fair and Earl Isaac. Studies of behavioral scoring by various researchers continued throughout the ’50s, ’60s and ’70s, as the first scoring models rolled out.

According to the timeline on FICO’s website, scores started out as partnerships with various businesses, banks and insurance underwriters. Over the course of the ’80s and ’90s, credit scores were used in loan application and credit limit decisions.

The introduction of scoring was an attempt to insert some objectivity into extending credit, but consumers had little awareness of the models’ role in the process. In 2003, the Fair and Accurate Credit Transactions Act gave people the right to see their credit scores and score ranges.

It helps to have an idea of what your score is before you apply for credit, so you can better anticipate your chances of getting approved. (Also, higher scores get lower interest rates.) There are hundreds of scoring models, but if you regularly look at the same score, you’ll get an idea of how your financial habits affect your score.

Today, you have lots of options for seeing your credit scores. Some credit card issuers allow you to check scores for free, and you can also purchase scores. You can see your credit scores for free at some consumer websites, including Credit.com, which offers a free account that provides you with two scores a month and tips on understanding and building your credit.