National Credit Education Month: The History of Credit Scores
While credit scores may seem like a relic of the financial world, they are a relatively new concept. Invented in the 50s, they have since become a crucial part of people’s financial lives. Learn the backstory of this important number, including why it was introduced and how it rose to the prominence it has today.
Before credit scores, the process of determining creditworthiness was a more causal process. Decisions were largely subjective, with individual loan officers using their best judgement to gauge whether a person was likely to pay back the financial institution. They may have even interviewed business owners in the community to get a feel for an applicant.
The industry needed a more accurate, impartial way to determine creditworthiness. So, in 1956, the Fair Isaac Corporation introduced the concept of credit scores. Headed by friends Bill Fair and Earl Isaac, they named this scoring model “FICO.” Sound familiar? While automated software popularized the concept in the late 80s, it reached further prominence after Fannie Mae and Freddie Mac advised mortgage lenders to use FICO® Scores during the home loan approvals process.
Credit scores today
Since its adoption by banks and credit unions, the credit score has become exceedingly important for potential borrowers. A good score opens the door to:
A lower annual percentage rate (APR). The APR dictates how much you pay in interest over the life of a loan. Or, in the case of credit cards, the amount of interest you must pay if you carry over a balance month-to-month.
Potentially higher credit limits. If you want a higher credit limit, lenders are more likely to fulfill this request if you have a good credit score because you’ve proven you pay bills on time.
Better housing options. Landlords and property managers may check your credit score when you apply to live at a property. They view on-time payments as an indication of whether you’re likely to pay rent on time.
If your credit score could use some work, start the voyage today toward a better financial future! General Electric Credit Union (GECU) works every day to Improve the Quality of Financial Lives. That’s why we offer a handful of complimentary resources, including on-demand webinars, over 70 financial calculators, and access to the Money Management budgeting app through Online Banking or our mobile banking.1 For a deep dive on credit scores, download our free eBook, The Ultimate Beginner’s Guide to Credit Scores. You’ll leave with a better understanding of these concepts and printable worksheets to aid you on the journey to an improved credit score.