When were credit scores invented? A history of credit and how it started

Credit scores as we know them today are a relatively modern invention. The FICO scores that most American consumers have encountered were launched in 1989, built on specialized credit scoring systems that originated in the 1950s.  

But the concept of credit evaluation has roots that stretch back centuries. Understanding this history helps explain why credit matters today and how businesses and consumers can leverage it effectively. 

Several thousands of years ago, for example, farmers borrowed to plant seeds and repay them later.  These business loans were an early example of lending, and credit to small businesses has been key to economic expansion ever since. 

In an 1834 speech, U.S. Senator Daniel Webster said “Commercial credit… is the vital air of the system…. It has done more, a thousand times more, to enrich nations, than all the mines of the world.”

If you’ve ever wondered where credit scores came from, this overview of the history of consumer credit scores and business credit will help you answer that question, and will give you strategies you can use to leverage credit today. 

The rise of consumer credit reporting

The general purpose FICO^® scores many of us are familiar with today launched officially in 1989, but its history extends further back. 

Before modern credit scores existed, lending decisions were highly subjective and often, not surprisingly, sometimes discriminatory. In the late 19th and early 20th centuries, the credit reporting industry began to shift from personal character assessments to more standardized data collection. 

Early credit managers employed by banks and department stores would interview individual borrowers and make subjective judgments about their personality and perceived responsibility. 

As Josh Lauer, professor of media studies at the University of New Hampshire and author of "Creditworthy," explains "Part of the job of the credit manager was to try to make inferences about the person's personality, whether they seem to be organized and mature and responsible."

Credit bureaus would often collect information in physical files and all kinds of information could be included. For example, several years ago, a former credit bureau employee shared a copy of a credit file from the 1970s that included, among other information, a newspaper clipping from that individual’s wedding. 

The transition to more standardized credit evaluation accelerated in the 1960s and 1970s. Credit bureaus began computerizing their massive consumer records, though early computers had limited memory. This forced bureaus to keep quantifiable data like the number of credit cards someone had while dropping more subjective variables.

Regulation also changed the type of information collected and used for credit purposes. 

The Fair Credit Reporting Act (FCRA) of 1970 required credit reporting bureaus to open their files to the public, and no longer report details such as race, gender, or disability. It also forced credit bureaus to stop reporting certain types of negative information after a specified period. The Equal Credit Opportunity Act of 1974 made it illegal to deny credit based on factors like race, sex, marital status, or religion.

The early days of business credit

Without business credit, we may not have the consumer credit systems we have today. 

"The United States is a nation built on credit, both public and private," writes Rowena Olegario in "The History of Credit in America." "Throughout the colonial period, British merchants provided the credit that fueled trade between England, Scotland, and the American colonies."

Credit bureaus helped to facilitate lending by helping creditors evaluate prospective borrowers. In the U.S., one of the earliest credit bureaus was the Mercantile Agency, founded by Lewis Tappan in 1841, and later sold to Robert Graham Dun who incorporated the company under the name R.G. Dun & Company. 

The agency solicited information from correspondents throughout the country to systemize a borrower's "character and assets." This data was compiled into enormous ledgers and then condensed and distributed in the form of enormous 'Reference Books.' In-depth evaluations were available only to subscribers of the credit service. However, this data was often too subjective, with many opinions reflecting racial, class, and gender biases.

During this time period, John M. Bradstreet Company was formed by its namesake founder and brought credit ratings into the mainstream by publishing the first book of commercial ratings.

Subscribers to both of these agencies demanded a more simplified evaluation method. In response, an alphanumeric system for credit evaluation was created. Eventually, the two companies merged in 1933 to form Dun & Bradstreet.

Fun fact: Four former presidents worked as credit reporters for Dun & Bradstreet: Abraham Lincoln, Ulysses S. Grant, Grover Cleveland, and William McKinley.

Experian traces its beginnings to London in the first half of the 19th century, where an association of merchants, the Manchester Guardian Society, shared information about customers. In the U.S., Jim Chilton founded the Merchants Credit Association in 1897. It was later acquired by TRW Inc. in 1989 which was then acquired by Experian in 1996.

The invention of the FICO score

While credit bureaus had been collecting information for decades (starting with paper files), a consistent method for scoring credit risk didn't exist until much later. 

In 1956, engineer Bill Fair and mathematician Earl Isaac founded Fair, Isaac and Company (now known as FICO®) in California. Their vision was to use data science and analytics to help lenders make better, more consistent credit decisions. 

Throughout the 1960s, 1970s, and 1980s, FICO designed custom credit scoring models for individual lenders such as retailers who wanted to offer credit to their customers. 

In 1989 FICO introduced its first universal credit score which was a standardized score that any lender could use without commissioning a custom model. This was the birth of the FICO Score as we know it today. But like any new product, they weren’t adopted overnight. 

These scores really took off after mortgage giants Fannie Mae and Freddie Mac announced in 1995 that mortgage applications would require a borrower's FICO score. This effectively cemented the credit score as a fundamental metric of credit risk assessment. Today, FICO says that its scores are used by 90% of top lenders and play a critical role in billions of lending decisions every year.

The 5 factors of FICO scores

The FICO Score uses an algorithm that analyzes information from credit reports and assigns a score typically ranging from 300 to 850. Five main factors make up the “FICO Formula”: 

• Payment history (35%): Your track record of making payments on time.
• Amounts owed (30%): How much you owe compared to your available credit.
• Length of credit history (15%): How long you've been using credit.
• New credit (10%): Recent credit inquiries and newly opened accounts.
• Credit mix (10%): The variety of credit types you use (credit cards, mortgages, auto loans, etc.)

Over the years, FICO has released many new versions (models) to the point where there are more than forty FICO scores today. 

VantageScore: An alternative emerges

In 2006, the three major credit bureaus introduced VantageScore^® as an alternative to FICO. Created as a joint venture between consumer credit bureaus Equifax, Experian, and TransUnion, VantageScore^® aimed to provide more consistent scoring across all three bureaus and to score consumers with limited credit histories. 

While FICO remains dominant in lending decisions, VantageScore^® has continued to gain traction, especially with credit card issuers and fintech lenders. In 2022, the Federal Housing Administration (FHA) approved using a VantageScore^® for FHA-insured mortgages. 

How is business credit established?

Businesses can build credit history through business credit bureaus. Understanding how business credit works is helpful if you're a business owner looking to access financing and build your company's financial reputation.

Business credit bureaus

Business credit bureaus operate similarly to consumer credit bureaus, but they track business credit behavior instead of consumer credit. The major business credit reporting agencies include:

• Dun & Bradstreet (D&B): The oldest and most established business credit bureau, covering more than 190 countries and markets
• Equifax Business: Maintains files on more than 76 million businesses with credit data
• Experian Business: Operates in 32 countries across four regions

The Small Business Financial Exchange (SBFE) is a data exchange whose 140+ members include all the top ten commercial banks. Members can access information from other members through commercial credit bureau partners. 

How to build business credit with tradelines

Like consumer credit scores, business credit scores are calculated using data about current and past credit accounts. In industry lingo, accounts that appear on credit reports are called tradelines.

Businesses that don’t have tradelines reporting are often called credit invisible.

Not all accounts report to business credit bureaus. If your goal is to establish business credit, you’ll need to make sure you seek out accounts that report payment history and  pay on time. Keep in mind that not all tradelines that are submitted impact all business credit scores.

Options to establish business credit can include: 

• Supplier net-30 accounts 
• Business credit cards
• Small business loans
• Business lines of credit
• Equipment financing

Learn how to establish business credit with Nav’s guide. 

The key role of credit in today’s world

Credit continues to fuel business growth worldwide. Credit scores make it faster and easier for credit card issuers and other lenders to make credit decisions. Instant credit decisions that help consumers to finance purchases can help businesses to make more sales. 

Credit scoring giants like FICO and VantageScore^® are always working to create newer, more predictive models. 

FICO has also developed business credit scoring models. The FICO^® SBSS℠ (Small Business Scoring Service) score is specifically designed for small business lending decisions, helping lenders assess the credit risk of small businesses more accurately.

Credit-based insurance scores also help insurers evaluate many types of consumer and small business insurance applications. 

Business owners can build credit for their business. With strong credit scores, they may find it easier to access a wider range of credit and business opportunities. Good business credit can help businesses qualify for lower interest rates, higher credit limits, and better payment terms — advantages that can significantly impact cash flow and profitability.

Nav can help you check, manage and monitor your business credit. With Nav Prime you’ll get detailed credit reports based on business credit data from major business credit bureaus, and can build credit with a tradeline.

Frequently asked questions

Where does business credit come from?

Business credit uses payment relationships between businesses and their creditors to help evaluate the risk of doing business with these companies. 

Positive payment history can help build strong business credit depending on the score and scoring model used. 

Why do credit scores exist?

Credit scores are designed to standardize the process of evaluating credit risk, to help make lending decisions faster, more efficient, and more consistent. Before credit scores, lenders relied on subjective assessments like manual underwriting using the 5 C’s of credit that were often time-consuming and not always impartial. 

But a surge in demand for credit during the second half of the 20th century made the manual review process impractical. 

Some researchers and advocates have raised concerns that current credit scoring models may be biased in key ways. Research by professors at the Gies College of Business, for example, has identified gender bias systemic in credit scoring models. And a 2021 study by a Stanford professor and Chicago Booth School of Business professor found that credit scoring models to be less accurate for lower-income families and minority borrowers.

While the benefits of credit scoring models over manual review and approval may be significant, some applicants may be left out.

Who came up with credit scores?

Engineer Bill Fair and mathematician Earl Isaac are widely credited with creating the concept of algorithmic credit scoring. They founded Fair, Isaac and Company (FICO) in 1956 and spent decades developing credit scoring models for individual lenders.

What did people do before credit scores?

Credit bureaus existed as early as the 1840s for businesses (like the Mercantile Agency) and grew for consumers in the early 1900s. However, these bureaus compiled subjective narrative reports rather than numerical scores. Lenders had to read through these reports and make their own judgments.

Before credit scores, lending decisions were often made through manual underwriting by credit managers employed by banks, department stores, and other creditors. These credit managers would:

• Interview loan applicants, sometimes in person
• Request references and documentation
• Consult local credit bureaus that maintained files on individuals and businesses
• Make subjective judgments about the applicant's character, personality, and perceived responsibility

The shift to algorithmic credit scoring in the 1970s through 1990s made the process more objective and efficient, though it also raised new questions about fairness, transparency, and the factors that should determine creditworthiness.