For the history lovers out there, a Time article provides an almost 200 year history of credit reporting.  A few interesting morsels:

• Earliest credit reports were character based:  “In 18th-century America, for instance, country storekeepers secured loans by asking well-regarded neighbors to vouch for their character to bankers and merchants. And urban creditors mined far-flung rural acquaintances for rumors and hearsay regarding applicants for credit.”

• Retailers saw benefits of selling on credit and therefore were early pioneers in developing credit histories on their customers: “Eager for these workers’ hard-earned dollars, many retailers—including America’s newfangled department stores and auto industry—extended generous credit lines.”

• Later, credit reports went beyond just credit to delve into people’s personal lives:  “Founded in 1899, RCC developed files on millions of Americans over the next 60 years. This information included not just data on credit, capital and character, but information on individuals’ social, political and sexual lives as well. Already a magnet for criticism, the outcry against RCC reached a fever pitch in the 1960s when the firm revealed plans to computerize its records.

• Eventually, regulators stepped into the breach to determine what the information that these agencies could collect:  “….the Fair Credit Reporting Act in 1970—a landmark piece of legislation that required bureaus to open their files to the public; expunge data on race, sexuality and disability; and delete negative information after a specified period of time.”

• The final step in developing a financial identity for all Americans came with the introduction of a credit scoring algorithm by Fair Isaac, the FICO score:  “Founded in 1956, the firm had already been selling credit-scoring algorithms for decades when the Big Three began their quest for an industry-standard credit score. The result, which hit the market in 1989, was remarkably similar to the algorithm still in use today. Quickly implemented throughout the consumer credit industry, the FICO score represented the final consummation of a process that began with the Bradstreet Company’s first credit-rating manual.

Interesting to see how the history of credit reporting has been dogged by concerns about privacy and surveillance as lenders seek more and more information about borrowers to provide insights on their ability to repay. With the advent of Big Data, I suspect the pace of innovation in this area will only increase.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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