Credit Reports And Credit Scores

A man checks credit reports
Credit History & Credit Scores
Part 1 Credit Reports And Credit Scores
Part 2 The FICO Score For Credit
Part 3 How To Improve Your Credit Score
Part 4 Credit Checks For Payday Loans

Many Americans are familiar with the idea of credit scores and view them as a normal part of everyday life. And, it’s true that a bad credit score or poor credit record can reduce your chances of being able to borrow money at a good rate or even being able to borrow money at all. In this article, we look at:

  • What credit scores and credit reports are
  • The history of credit reporting
  • Issues with privacy and credit scores
  • The Fair Credit Reporting Act

What is a credit score?

If you are not familiar with the concept of credit scoring you can use this article to learn about the background of how this type of financial report has become so influential in dictating how you much you will pay for a mortgage, a credit card or even for home insurance.

A credit score represents to lenders how creditworthy you currently are

Basically, a credit score is just a number but for lenders it represents how creditworthy you are. That is, how likely you are to pay all your financial obligations. A credit score takes into account a lot of factors that are present in your financial history and they are used widely by lenders because this is an inexpensive way to underwrite a loan or other type of credit.

Your credit score will reflect everything about your financial identity. So, if in the past, you have defaulted on payments for a loan or credit card, this will show up on the report. Conversely, good financial behavior will result in a higher score and this will give you many more options when you want borrow in the future.

History of credit reporting

Historically, even as far back as the last two hundred years, credit reporting was going on but it was mainly a personal exchange between sellers and buyers. As far back as the 18th century it was common practice for the new owner of a store to ask a well renowned person in the community to vouch for their character so that they could have access to a loan from the local bank.

A picture of US coins and dollar bills

As time went on there began to be a more formal aspect in evaluating the risk of someone who wanted to borrow money. This started with loans to businesses and entrepreneurs and it was not until much later that it was applied to individuals.

The Mercantile Agency

The Mercantile Agency founded by Lewis Tappan was the first office of its kind to start producing ledgers containing information about the character of borrowers and debtors.

The reports were very subjective and unfairly biased along the lines of gender, race and class. These early types of credit reports had not much basis in facts but relied heavily upon hearsay and gossip. Later the agency introduced an early form of credit scoring based on a numerical system that stayed in place until well into the twentieth century.

Credit reporting

This first form of credit scoring became the basis for creating a financial identity and this is now firmly embedded into the system of lending and borrowing. But, in much earlier days there was no consumer credit reporting as this was not needed.

Historically, credit reporting was going on but it was mainly a personal exchange between sellers and buyers.

Most farmers bought seeds and other agricultural supplies from the local store which allowed them credit. When the harvest came in, the store got paid and also reaped further profits as the families bought clothing and other goods at the end of the season.

Towards the end of the nineteenth century large department stores and the new automobile retailers saw an opportunity to increase profits. They began to allow lines of credit which increased the opportunities for working people to become more middle class. By 1912, credit managers like Dun & Bradstreet had formed a national association for collecting information and sharing it with retailers.

Issues with privacy

One of the most important pioneers in the credit reporting sector was based in Atlanta. The Retail Credit Company kept diligent records from 1899 for more than 60 years and the information collated included some personal details such as political leanings and social conduct. When the company decided to put its records on computers in the 1960s there was an outcry because it was deemed to be a threat to the consumer’s privacy under civil liberty laws.

A lady is checking her credit report looking for errors

People felt that there was never going to be a way to outrun their past if the whole of their financial identity was put onto a computer record. The furore that erupted from this event led to the Fair Credit Reporting Act.

The Fair Credit Reporting Act

The Fair Credit Reporting Act of 1970 required all credit bureaus to allow the public access to their records. The Act also forced bureaus to get rid of old and outdated information after a specified period of time and the records were also expunged of personal details about race, disability and sexuality.

The result of the act actually helped further the activities of credit bureaus and the RCC changed its name to Equifax, a name under which it still trades today. Along with Experian and TransUnion, Equifax is part of the Big Three triumvirate of credit scoring agencies that can have such an effect on anyone who wants to obtain credit.

Credit History & Credit Scores
Part 1 Credit Reports And Credit Scores
Part 2 The FICO Score For Credit
Part 3 How To Improve Your Credit Score
Part 4 Credit Checks For Payday Loans

About the author

David Warren

David Warren is an expert on personal loans across the United States. His career in banking has helped make David the loans specialist that he is today. He shares his analysis and insight into the personal finance industry on