Even though commercial enterprises have kept track of consumers’ credit histories around the United States for more than a century, the notion of applying a quantifiable score to folks’ personal relationships with debts such as credit card debt, loans, mortgages, etc remains relatively new. After all, in its original incarnation, credit bureaus were little more than informal gossip passed along from merchant to merchant about the advisability of extending loans to various townspeople. With the massive technological and economic alterations seen through the industrial revolution near the end of the nineteenth century, interstate commerce required some degree of credit reportage less dependant upon opinion and able to be swiftly verified so much so that a whole industry called credit counseling has developed.
While the early efforts toward credit reports generally concentrated upon warning signs – a wide ranging set of criteria as likely to include sardonic commentary about a borrower’s bathing practices as his or her (though likely his) trustworthiness – the more popular credit bureaus had adopted a more useful and efficient tone of professionalism even before the Fair Credit Reporting Act was enacted almost thirty years ago. Through employing the FCRA, ordinary citizens could request a perusal of their own credit reports and, though future legislation would greatly expand such powers, argue for the correction of baseless charges.
Still, though the credit reporting agencies were now held responsible for the accuracy of their labors, a great degree of subjectivity still came into play whenever underwriters evaluated prospective lending opportunities through the garbled prism of credit histories that could easily span twenty pages. It wasn’t until 1989 that a leading mathematician at the Fair Isaacs Corporation, a pioneer in statistical models whose prior success involved vaguely defined consultant work with the most powerful financial institutions, first originated a method of numerically approximating the creditability of consumers absent any additional information regarding income, race, gender, and so on.
There will always be something more than a little suspicious about any logarithm that promises to reduce the sum total of such a complicated topic to a three digit number between three hundred and eight hundred and fifty points. Nevertheless, the FICO credit scoring system was considered a remarkably progressive step forward from the outset. Although the Fair Isaacs Company and their FICO statistical matrix have basically been synonymous with credit scores since they as much as invented the form two generations ago, borrowers should no longer presume that to always be the case. The ‘big three’ credit reporting agencies have no direct connection with the privately owned Fair Isaacs firm and have long chafed under the demands of a FICO model that must continually be licensed at outrageous expense.
This remains the case for the TransUnion and Equifax credit bureaus, but Experian has come up with their own Vantage scoring system that differently weights the various criteria with potentially disastrous consequences for borrowers on the approval bubble who find the alternative approach to credit score calculation less forgiving of their particular dilemmas. The one exception to this lies with home loan companies. Since formal mortgage estimates involve credit checks, the statistical design influencing credit scores has been edited to ignore several inquiries from licensed mortgage lenders conducted within the same month. For that matter, mortgage brokers are the only loan officers to be allowed both the Vantage and the FICO scoring option, and, for borrowers interested in learning all that they can about their scores, that could be a vital bit of data.
Additional Resources
- "A lender's error is killing my credit!" - Dear Money Helps: Two years ago, my mortgage company applied one of my monthly payments to someone else's account by mistake and reported to the credit bureaus that I'd been 30 days late. My credit score plunged 150 points as a result. ...
- How To Make Your Credit Score Suck - Last week, I posted on the difference between a credit report and credit score. We learned that your credit score is an important number that decides not only your interest rates for loans, but can also effect whether you can rent an ...
