The True History of Credit Scores

there is more tweets online Recently, on the fairness of credit scores and consumer credit reports.It’s a hot question: This semi-hidden number can define a person’s lifeHowever Few people understand how exactly credit scores are determined. So where do credit scores come from? Who decides what they are? how unfair are they?

What is a credit score and how is it different from a credit report?

A credit score is a numerical representation of an individual’s creditworthiness. The most widely used credit score, the FICO score, derived from an analysis of incurred liabilities and payments made, typically ranges from 300 (bad risk) to 850 (very poor credit quality).worth it).credit report Raw data used to determine your credit score. It consists of your credit account history, credit references, and public records.

Banks and other lenders use your credit score and other details to decide whether to lend you money, how much you can borrow, repayment rates, and other lending criteria.

Who Determines Your Credit Score?

There are a number of credit bureaus in the US, but there are three major players in the consumer reports game: Experian, TransUnion and Equifax. All three of these private companies use similar calculations to determine his FICO score, as different lenders and creditors may use slightly different formulas to calculate their scores. , each number may be different. We also rely on reports from creditors and other agencies that do not report to all credit bureaus.The most widely used credit score is In addition to FICO scores, the big three credit bureaus have also created their own numbers called VantageScores.

How is my credit score calculated?

Your FICO score is a combination of five factors:

• Payment history: 35% of score
• Loan or credit card debt: 30% of score
• Credit history length: 15% of FICO score
• Type of account held: 10% of FICO
• Recent credit activity: 10% of FICO

Within that broad framework, I have many So the tedious details that determine your number are regularly updated and tweaked.

Where did the current system come from?

The history of credit itself may be as long as the history of financial transactions, but in most cases the current system was born 1800s, with commercial credit report.primarily based on It is the subjective opinion of credit bureaus, and for commercial entities only, that early credit checks: Racism When anti-semitism as you might expect, and vague subjective opinion Although he generally has a bad reputation as a man, like Gen[erall]y sup[pose]have moneyHow Helpful.

Centralized consumer credit check Dating back to 1912In the 1990s, retailers, who used to keep individual records of the risks posed by consumers, pooled their resources and shared records with each other. It was not above. They relied on information about people’s social, political, and sexual lives, which contained a lot of subjective opinions about money making. The system was neither fair nor a particularly useful way of judging creditworthiness.

As consumer lending expanded over the decades that followed, lenders worked toward a broader, more understandable and objective system, but it wasn’t until the early 1970s that it resembled the current credit reporting system. did not. In 1970, Fair Credit Reporting Act became law. race, sexuality, and obstacles credit report; requirement The level of transparency of the credit bureau.requirement Liabilities are removed from the report after a certain period of time. etc.This got me ready for pure numbersbased credit decisions — objective but impersonal.

Enter your FICO score. First created in the 1950s, Fair, Isaac and Company’s algorithm was formally adopted by his three major credit bureaus in 1989. FICO calculations are updated from time to time, but the situation has basically remained the same since then. I have been using FICO 9 ever since. In 2014, the algorithm changed to include rent payments, reduce the burden of medical expenses, and exclude paid collection accounts from the score calculation.

But aren’t credit scores and credit reports inherently unfair?

How fair the credit scoring system really is is very complicated.wood system critic (Consumer legal organizations, politicians, debtors unions, etc.) Race, Gender, and hindrance Excluded from credit reports, but in practice there is still discrimination in the system effectThey argue that it perpetuates, and even exacerbates, inherently established systemic biases. This leads to worsening credit scores and a never-ending cycle of poverty. Other criticisms include employers using credit reports to make hiring decisions, lack of transparency, inaccurate reporting, and the dehumanizing impact of reducing people to numbers. There are many criticisms.

The future of credit scores

According to some industry insiders, your FICO score is considered by about 90% of top lenders, but the number itself is becoming less and less important. Credit agencies compete to identify good borrowers. So that’s how they build their bank. So they are all working to find a better system. CreditKarma CEO Ken Lin estimates that your credit score is only 20% to 40% of a lender’s final decision. Instead, the lender independently weighs other information in the report to determine how much to lend.

“Rather than just saying‘THis person failed to pay twice. The bank is looking at factors such as the amount of the payment and the payment to the other party,” he said. street.

How to get a copy of your credit report

Getting a copy of your credit report is easy. And you have to know where you stand and make sure you’re right. You are eligible to receive a free annual credit report from all three major credit bureaus and can be obtained by visiting the following URL: freecreditreport.com Or call (877) 322-8228. Additional credit reports can be obtained if credit is denied, if the report appears to be inaccurate, and for other reasons. Contrary to popular belief, request a copy of my credit report It doesn’t lower your credit score.