The History of Credit: From Trust-Based Borrowing to Modern Credit Scores

Along with MTV, disposable cameras and big hair, we have the 1980s to thank for something a little less fun: the credit score. And while it might feel like credit scores have been around for a really long time, in fact they’re younger than about 60% of the U.S. population. 

In their short lifetime, credit scores have become a household name—and essential to so many financial transactions, from buying your first house to even just applying for a job. (Yes, employers sometimes request credit scores for candidates. It’s a thing.) These three little numbers could be the difference between getting an apartment, a job or being able to spend on your credit card when you’re between paychecks without incurring tons of interest or late fees.

The credit score as we know it was invented in 1989. 

That might help explain some of the odd things about credit scores, like how paying off an installment loan early can actually temporarily reduce credit score (it’s true!) and how you have to have credit to build credit. This leaves almost 50 million Americans who are credit-invisible out of the system.

And people are catching on: in 2020, over half the complaints to the Consumer Financial Protection Bureau had to do with credit and consumer reporting. 

Here’s a quick journey through the history of credit scores:

• Early 1800s: Trust-Based Borrowing
  businesses could borrow money based on word of mouth

  
  

• Panic of 1837: [Over]Extension of Credit
  a depression caused by merchants’ lending too much credit at once

  
  

• 1841: Lewis Teppan founds Mercantile Agency
  “Tappan set out to systematize the rumors regarding debtors’ character and assets. Soliciting information from correspondents throughout the country, Tappan’s agency distilled these reports in massive ledgers in New York City.” (TIME)

  
  

• 1857: Bradstreet’s Innovation
  Bradstreet creates a commercial credit rating system based on a history of (mis)informative “facts”

  
  

• 1864: R. G. Dun and Company's Alphanumeric Credit System
  the Mercantile Agency, renamed R. G. Dun and Company on the eve of the Civil War, finalized an alphanumeric system to measure commercial creditworthiness

  
  

• 1912: Associations Est.
  Credit managers formed a national association or collecting, sharing and codifying information on retail debtors (TIME)

  
  

• 1940s: Judging You
  Banks had credit managers who had to judge potential borrowers by a variety of factors including their appearance, marital status, and more.1 

  
  

• 1956: The Birth of FICO
  two Americans with a belief that data could change the financial industry started FICO (Fair, Isaac, and Company)

  
  

• 1960: Lights, Camera, Action
  The national consumer finance association produced a short film called Wise Use of Credit: 

  
  

• 1960s: Early Credit Scoring Algorithms
  The first credit scoring algorithms were used for individual businesses and their unique customer base to have customers hold 30 day credit or charge accounts at their local stores

  
  

• 1968: Comprehensive Data Collection
  Atlanta’s Retail Credit Company revealed plans to computerize its creditworthiness records, which included “not just data on credit, capital and character, but information on individuals’ social, political and sexual lives as well” (TIME)

  
  

• 1968: Truth above all
  The Truth in Lending Act (TILA) was passed to protect consumers “against inaccurate and unfair credit billing and credit card practices. It requires lenders to provide you with loan cost information so that you can comparison shop for certain types of loans” 

  
  

• 1970 - Fair Credit Reporting Act
  introduces protections around the data that lenders could use and store 

  
  

• 1974: Equal Credit Opportunity Act 
  made it illegal to deny credit based on factors like race, sex, marital status or religion

  
  

• 1988: Fair Credit and Charge Card Disclosure Act
  amended the Truth in Lending Act (TILA) to require new disclosures of information in connection with credit card and charge card account applications and solicitations

  
  

• 1989: FICO Score As We Know It
  The Fair Isaac Corporation (FICO) introduced the first consumer credit score This was the first industry-standard credit scoring system that could be used to evaluate all consumers. 

  
  

Looking back, we’ve come a long way from the days when a guy at the bank could judge you based on your appearance (ahem, in a discriminatory way) before turning you away for a loan. But judging by the number of complaints to the CFPB about credit reporting, the you-have-to-have-it-to-get-it system, and the way this disproportionately underserves some communities, the consumer lending industry still has a long way to go when it comes to making lending decisions that truly and equitably benefit people. 

We win when you win

At Possible, we do things differently. We are a Public Benefit Corporation, and that means we’re economically incentivized to align with your long-term interests. That's not the case with many other financial services companies and business models. Our products help you build your credit history and never have hidden fees. Quite simply, we don't make money by keeping you in debt.

Similarly, when you borrow from Possible, you are more than your credit score. Here, your application includes a variety of factors like income, cash flow and more. We believe your eligibility should be measured by a diverse set of factors—even including your history with Possible as a factor. 

Occasionally, we review a report called a Clarity report. Clarity is an Experian product that helps companies like Possible understand your borrowing habits with nontraditional forms of credit, like cash advance apps and other forms of credit. 

Our team is constantly evolving our technology to give you the best experience, make sure you’re able to repay the amount you borrow, and support your needs financially. 

The credit trap: you have to have it to build it

It’s our mission to end the debt cycle at Possible—and helping our customers build credit is essential to achieving that mission. When it comes to credit, our CEO, Tony Huang, explains how millions of Americans are shut out of the system: 

“There are so many things that you can’t do if you don’t have good credit. You can’t buy a home. Certainly, you can’t buy a car, you can’t get an auto loan. You can’t even get a rental apartment in some places because they will pull your credit score. So it’s this three-digit number between 300 and 850 that can dictate a lot of opportunities that you may or may not have access to in life. And yet so many millions of Americans didn’t start out with good credit because of not their own wrongdoing but just extenuating circumstances… we hear a lot of those stories. On-time payments is a very important part of a good credit score—and yet when you’re credit-invisible or have a low credit score, no one would give you a loan or a credit product to even demonstrate that you’re capable and you’re trustworthy. And that’s why it’s important for us to report to major credit bureaus.” 

Without the opportunity to start somewhere, many people have never increased their credit score. We’re here to change that. At Possible, we believe in providing that opportunity. 🟦