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The History of Credit Scoring

Credit scores have a relatively young history.  Up until the 1970’s, if a financial institution wanted to know if a potential borrow was a good candidate for lending, they would simply make phone calls to various merchants and people they thought might have some first-hand or personal knowledge of the individual seeking a loan.  They would ask questions and seek opinions about their potential borrowers.  It went beyond simply asking about someone’s ability to repay their already established loans.  They would even seek to learn personal information.  In fact, they would work in secret, calling such organizations as the Welcome Wagon to inquire about the condition of someone’s home, character, cleanliness etc.

In the 1960’s, as credit cards started to become popular, Congress stepped in and started investigating. What they found was blatant discriminatory actions being done by the various credit bureaus and financial institutions.  In 1971 Congress passed the Fair Credit Reporting Act to establish guidelines which would protect the consumer and ensure fair practices.  The legislation was designed to promote accuracy in the credit reporting and set a guideline for risk factors.

With increased use of credit, continued fears of identity theft, legislation continued working on ways to further protect and improve consumer awareness, and on December 4, 2003, George W. Bush signed into law The Fair and Accurate Credit Transactions Act (FACT or FACTA) to do just that.

American consumers who wish to obtain copies of their credit reports can do so once every 12 months by visiting www.annualcreditreport.com.  The credit scores will reflect those as reported by the three main credit reporting agencies (CRA’s): Equifax, Experian and TransUnion.  It is a good idea to periodically check your credit report to ensure accuracy.