The History of Credit Scores

Please be aware that this is a sponsored post from Credit Repair that contains affiliate links, complying with FTC regulations.


My bank recently started to provide free FICO scores.  It’s a great benefit, but honestly, I had no idea what my FICO score was until recently.  Since I don’t carry debt and consistently pay my bill balances on time, I assumed I had a score of 850.  Much to my chagrin, it was actually 813.


I thought there had to be some mistake.  As I began digging deeper, I found that I essentially face a penalty by not having any loans.


I guess I shouldn’t be too upset.  Dave Ramsey famously brags that he does not have a FICO score since he doesn’t use credit cards or loans.


Since I didn’t know much about credit scores, I started doing some research on it.


The History of Credit Scores

Before traditional credit scoring came along in the 1950s, banks and lenders would assess potential customers based on relationships.  This meant you needed to know your banker fairly well, and he or she had to be familiar with your payment history.


Because of this, assessments were much more character-driven than quantitative-driven.  Even if you had a great credit history, a banker or lender that didn’t care for you could easily deny your loan.


As most of you would assume, this led to disenfranchisement for certain individuals who otherwise would be entitled to loans.  


Fair & Isaac

In the 1950s, Bill Fair and Earl Isaac were diligently working to create an automated credit scoring system to reduce the bias of qualitative decisions and instead promote quantitative decision-making by lenders.


Within two years of the company’s start, Fair and Isaac began to sell their credit score idea to banks in the United States and around the world.


They received a big boost in 1970, when the Fair Credit Reporting Act passed, regulating what information could be collected and reported by lenders on their customers.  In turn, this act created a standardized way to review and enhance the collection of data.


The actual FICO score that we are all familiar today with was not created until 1989.  


Today, the three main credit bureaus are Equifax, Experian and TransUnion.  Each one of these credit bureaus uses a slightly different proprietary scoring system to determine your score.  When aggregated together, they generate your FICO score.


The Components of Your FICO Score

Although the exact formulas are secretive and proprietary, FICO has disclosed the make-up the components of your credit score.

fico credit score

Source: Navy Federal Credit Union

35% of your score is based on your payment history.  This means that any bankruptcies, foreclosures, settlements, and even late payments can affect your FICO score.  


30% of your score is based on your debt burden.  FICO reports that there are six different metrics in the debt category, including the debt-to-limit ratio, the number of accounts with balances, and the amounts owed and amounts paid down on your loans.


15% of your score is based on your credit history.  The longer your credit history, the bigger the impact it has on your FICO score.  There is a focus on the age of your accounts and specifically the age of your oldest account.  This is why some financial experts advise against closing your oldest credit card accounts.


10% of your score is based on the type of credit used.  Whether, it’s a mortgage or credit cards, having different forms of credit shows the lender that you can handle different types of debt.


10% of your score is based on credit inquiries.  When you have many inquiries on your credit, it can hurt your score.  However, do not fret if you are shopping for a mortgage, auto, or student loan.  These loan inquiries do not count against your FICO score if they are less than 30 days old, and they have no effect after the first year.  Also, if you are out looking for a new job and a potential employer inquires on your credit score, that is a “soft inquiry”, and FICO does not consider it.


FICO Score Ranges

Currently the average FICO score is 700, which means that most Americans fall into the “Good” credit rating.  Based on the chart below, you can see the FICO score ranges along and the corresponding impacts.  


Credit Score Rating % of People Impact
300-579 Very Poor 17% Credit applicants may need to pay a fee or deposit, and applicants with this rating may not be approved for credit at all.
580-669 Fair 20.2% Applicants with scores in this range are considered to be subprime borrowers.
670-739 Good 21.5% Only 8% of applicants in this score range are likely to become seriously delinquent in the future.
740-799 Very Good 18.2% Applicants with scores here are likely to receive better than average rates from lenders.
800-850 Exceptional 19.9% Applicants with scores in this range are at the top of the list for the best rates from lenders.

Source: Experian


While my wife and I are not at 850, we are happy to be in the “Exceptional” category.  We are thankful to be able to tap into some of the best rates in the future if we need to.  

I received compensation in exchange for this article.

So readers, did you know the origins of the credit score?  Do you know what your FICO credit score is?  Share your thoughts below.

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  1. Good timing given the breach yesterday of Experian. The percents you listed are always interesting. When people find out I churn credit cards for travel hacking they always ask does my credit score suffer. Your percents are the reason I usually say in some ways it helps as it lowers credit utilization.
    FullTimeFinance recently posted…One Year of BloggingMy Profile

    • I didn’t intend to have the article come out the day after the breach but I won’t complain 🙂 I think most people don’t quite understand their credit score and especially their utilization rates.

  2. Your credit score is AWESOME!! I have a long way to go to catch up with you. I think it’s ludicrous that you are penalized for having complete control of your finances and not having any debt.

    I was told go take out a car loan to build my credit, and it was one of the biggest mistakes I have ever made.

    Thanks for sharing the history of credit card scores. I had no idea and never looked into it. @_@
    Ms. Frugal Asian Finance recently posted…List of Asian Personal Finance Bloggers – Part 4My Profile

    • I have to admit I had no idea about credit scores until I started to research for the article. It wasn’t high on my topic of things to read about it but I’m really glad I did 🙂

  3. I discovered that my credit score and history was important for my financial health. It can also save me a lot of money when I start to borrow money to invest. So I often contact Equifax and TransUnion about once a year to obtain a free report to ensure that my credit history is correct.

    Regardless if you plan to borrow money or not, it’s prudent to maintain a clean and healthy credit history.
    Leo T. Ly @ recently posted…I Don’t Want To Be Mortgage FreeMy Profile

  4. What is funny is how much the credit score will fluctuate from month to month. Over the last 6 months mine has bounced from 794 to 823. I don’t really pay much attention to it.

    It is funny how people hold those numbers so near and dear to them. I’m like you can have a good credit score but be in a terrible financial situation.
    Grant @ Life Prep Couple recently posted…Stop Saying “I Don’t Have Time”My Profile

    • Yeah I’ve never understood why it bounces. It should be more consistent unless you do something really great or really bad. I’ve never understood the fluctuations. I’m not sure they probably do either…

    • Thanks for sharing Jeff!!! Based on some of the numbers it looks like if you have excellent credit you are treated different than good. The difference is small but it definitely adds up over time. I wish they would make it more transparent on how to achieve optimal scores.

  5. I knew it was part of the credit act but didn’t know any of the history before that!
    It’s sort of funny that I’ve never particularly cared what my score is but I passively check it since my bank includes one bureau on my statement.
    It’s also funny that my score only goes higher the less I need it! (They are probably trying to get me to borrow money)
    Budget on a Stick recently posted…Don’t Tell Others How To…My Profile

  6. I recently noticed that my bank now offers a free credit report too. I ran mine a few years ago and it was over 800. Thanks for sharing the history of the credit report. I never read much about it before. When people talk to me about their credit report, I tell them that their saving rate is much more important.
    Dave recently posted…The Aldi ExperienceMy Profile

  7. Interesting information. Thanks for digging into the details. My credit union reports my score every month automatically and I find it entertaining that my score changes by 10 – 20 points each month even though there is no new activity. Ah well. I’m right around 810, so it doesn’t really matter 🙂

    • Thanks for sharing Sarah!!! I don’t completely understand the algorithms that allow our scores to bounce. Never made sense and it’s proprietary so they’ll never show 🙁

  8. The way the scores are dispersed evenly over quintiles leads me to believe the the scores are not linear. I would expect a more standard distribution (bell curve). The implication is that the score has more relative significance than I previously believed. If my supposition is correct, the components to your credit score could remain the same but your score goes down because relative to everyone else, you score is lower. Stated otherwise, the same components that yield an 800 score today will yield a different score tomorrow.

  9. Whenever I log on to my banking or credit card account, they provide a link to check my FICO score. It funny that my score is always going up and down even though I do the same thing every month like paying my CCs in full every month and having consistent spending habits. One month I had score of 775 then the following month it was 790 and the month after it was 783. Kind of mind-boggling but I don’t put a lot of emphasis on it.

  10. Mine fluctuates too, but I believe that has to do with current credit utilization (e.g. if you have a credit card with any balance at all, even if you pay monthly). And maybe other factors.

    What’s sad is that today, people focus on “FICO scores.” But FICO scores are merely a measure of how much you repay debt. Like Dave Ramsey, you suffer if you’re not a big debtor – banks don’t do real underwriting as much anymore.
    Mr. FWP recently posted…Student Loan Conqueror! A Guest Post at Less Debt, More WineMy Profile

    • Thanks for sharing!!! I definitely think people worship their FICO score a bit too much. With Experian getting hacked it will be interesting to hear how credit scores will be impacted if people don’t want Experian utilizing their information anymore.

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