Credit History

by Andrew Downing

Prior to establishing a system to track credit history, lenders primarily decided creditworthiness based on personal income, character judgements, and references, but the final decision for loan approval was subjective and unfair for many borrowers. Someone with good credit history could be turned down based on the creditor’s casual opinion of their appearance or demeanor. An objective credit system helped pave the way for fairness in financial matters, but the creation of that credit system has a long history.

1830: Financial institutions began using mortgages, usually 15-year terms with variable interest rates.

1899: Retail Credit Company (RCC) was founded in Atlanta and began collecting credit data, including credit information, political and social preferences, and rumors.

1908-1928: Ford Motor Company began a layaway program for the Model T, but when General Motors started giving loans to customers in 1919, Ford started an auto loans company in 1928 to compete.

1938-1970: Federal National Mortgage Association (Fannie Mae) was created in 1938, and mortgages were offered more regularly. Home ownership went from 19% in 1949 to over 40% by 1967.

1950s: Consumers were introduced to credit cards, but the balance had to be paid off at the end of each month. By 1960 most credit cards allowed a revolving line of credit.

1956: Bill Fair and Earl Isaac established Fair, Isaac and Company (FICO) and developed an analytical and objective method to keep track of someone’s credit worthiness.

1974: Congress passed the Equal Credit Opportunity Act, which expanded the ability of women to establish credit, using household income as an indicator of creditworthiness (instead of personal income).

1989: FICO was adopted as an industry-wide measure of creditworthiness, which enabled an impartial measurement of creditworthiness without relying on the biases that had previously influenced the financial industry. The widespread use of credit scores have made the process for credit approval fairer, quicker, and more objective.

Present: FICO is the current industry standard, with credit scores ranging from 300 to 850. The algorithm uses payment history (35%), amounts owed (30%), length of credit history (15%), types of credit used (10%), and recent credit inquiries (10%).

Unique ways to establish or improve your credit history:

• If your landlord does not report your rental history to the credit bureaus, you can use an online service like Pinch Rent or RentTrack, to record your rent payments and count them towards your credit history.

• Consider starting with a secured credit card.

• Use a credit builder loan, offered at local credit unions/community banks and some online financial institutions, such as Self or Digital Federal Credit Union. Some can even be shared among customers so you can build more than one credit score at a time.

• Become an authorized user on someone else’s credit card. It may be awkward to ask, but when a responsible family member or partner adds you to their card, their payments count toward your credit score.