Credit scoring has become an essential component of the lending process since it was first introduced in 1989 by Equifax. The method of using a numerical credit score to determine a borrower’s creditworthiness has revolutionized the lending industry.
Prior to the introduction of credit scores, lenders relied on subjective and inconsistent methods to evaluate borrowers’ creditworthiness, which were unreliable and often led to discriminatory lending practices.
Without a credit score, a person cannot now access many of the financial products and services, such as loans and credit cards, that are available in the modern economy. Let’s take a look at how the very concept of credit scoring came to be and how it has revolutionized the lending industry since then.
The Birth of Credit Scores
Credit scores were initially introduced in 1989 when Equifax made its BEACON score commercially available. This was followed by TransUnion and TRW releasing their credit scoring models built by FICO, which became known as the EMPIRICA and TRW/Fair Isaac Risk Score, respectively.
Later in 2006, the three major credit reporting agencies collaborated to create the VantageScore credit score, which is now used in conjunction with FICO.
These credit scores provide lenders with a consistent and objective measure of a borrower’s creditworthiness. FICO scores range from 300 to 850, with a score of 670 or higher considered a good credit score.
The FICO score ranges from 300 to 850, with a score of 670 or higher considered a good credit score. The VantageScore ranges from 300 to 850, with a score of 661 or higher considered a good credit score.
Over centuries, lending has evolved from a simple agricultural transaction to a complex financial system that relies on credit scores and collateral, with the potential for government intervention during times of crisis.
The Historical Evolution of Lending
The earliest example of lending comes from agricultural communities in Mesopotamia, where farmers borrowed seeds and shared their harvest to pay their debts. Religious temples in ancient times became the earliest banks because they were considered a safe place to store money.
During the Middle Ages, lending at interest became a point of contention when ethics and religion had closer relevance to state laws and culture. However, in the 18th century, banks began to appear in America to provide currency to colonists who needed a means of exchange.
In the 1800s, lending played a large role in encouraging working-class citizens to become financially stable through savings and home ownership.
Today, debt relief programs and debt settlement counselors exist to help individuals struggling with debt.
This history of lending highlights how the practice has influenced the growth of economies and societies throughout history.
Credit scoring has today changed the game of lending in a fundamental way, providing a more objective and reliable measure of creditworthiness, allowing lenders to make more informed decisions about who to lend to and at what terms.
How Credit Score Changed the Game
The advent of credit scoring has changed the game of lending in a fundamental way. Credit scores have provided a more objective and reliable measure of creditworthiness, allowing lenders to make more informed decisions about who to lend to and at what terms. The scoring method has increased access to credit for small business owners and individuals with little credit history, leading to economic growth and job creation.
In addition to this, borrowers with higher credit scores can access better loan terms and lower interest rates, which empowers them to make better financial decisions and ultimately achieve greater financial stability.
Moreover, the availability of credit monitoring services and free credit reports has empowered consumers to monitor their credit and make informed decisions about their financial well-being.
Nevertheless, the use of alternative data sources in credit scoring has raised concerns about potential discriminatory lending practices. As lenders increasingly rely on alternative data sources, there is always a risk that certain groups may be unfairly discriminated against.
The Bottom Line
In the lending industry, credit scoring has proved itself as a game-changing method by providing a consistent and objective measure of creditworthiness. Lenders, prior to Equifax’s BEACON score, relied on subjective evaluations that often led to discriminatory practices. Credit monitoring services and free credit reports have given consumers greater control over their financial well-being. Concerns about using alternative data sources in credit scoring, however, have raised questions about potential discriminatory lending practices. That’s why, ensuring that credit scoring is fair and non-discriminatory to promote economic growth and job creation while expanding access to credit, seems to be crucial.