Building Credit: 50 Years Ago vs. Today
Modern credit scores are a complex balance of your payment history, debt load and credit mix that is calculated by a constantly updated algorithm. Yet the credit score has been around for decades. You might wonder, how was anyone assigned a credit score before the age of computers?
Without today’s technology, would an accurate credit score be more difficult to build? Let’s explore the different challenges faced by credit builders — then and now.
Credit building yesterday and today
Before the 1950s, loans were given by lenders on a more personalized basis. Loans were decided based on your standing in the community, perceived ability to repay and general demeanor. In 1970, the Fair Credit Reporting Act began to regulate what information could be collected and how it should be handled.
In the past 50 years, building credit has changed. Credit bureaus have created an easier way for everyone to have and access an accurate credit history. Through the creation of a system that assigned a credit score to potential borrowers, the entire world of credit became easier to navigate. Let’s take a look at three different aspects of credit to better understand the change.
Loan application process
50 years ago
The application process for a borrower involved extensive physical paperwork that had to be completed for each potential lender. Instead of having access to loan options within minutes, the applicant would have to wait to hear back from several different banks. The process could take much longer than today because the lender typically had to request the entire paper file from a credit bureau before it could make a decision about the loan.
Loan applications are not the time-consuming chore they once were. As the applicant, you typically need to provide only some basic information, such as proof of income, bank account information and your Social Security number. A lender could then provide a loan offer within minutes. The difficult part for the borrower is sifting through the various offers to find the best terms for their situation.
50 years ago
A borrower’s credit history still contained many of the same elements 50 years ago that it does today: payment record, any missed payments and how many loans the borrower was currently paying off. Credit bureaus still tracked your credit history based on lender reports, but these reports could be less reliable thanks to the lack of technology connecting consumers to their every financial step (and misstep).
In theory, credit histories should not differ dramatically from the credit histories in the past. Although the credit histories aimed to report the same information, today’s credit histories are more complete than they were 50 years ago. The difference comes along with the connectivity we enjoy today. Lenders are able to report valuable information back to the credit bureaus on a consistent basis.
50 years ago
Credit scores as we know them did not exist 50 years ago. Although individuals had a credit history, the lenders made their decisions based on the entire file, which included a somewhat subjective score at the end. In the 1950s, an engineer and a mathematician, William Fair and Earl Isaac, developed an automated scoring system that eventually became the FICO credit score. Although the first scoring system was created in the 1950s, the first official, general purpose credit score was not developed until 1989 by Fair Isaac Corp. The scoring system was set on a scale from 300 to 850, and an individual’s score represented a snapshot of their current financial standing.
The credit scores that we rely on today are based on heavily tested algorithms that are updated regularly. Since 1989, the algorithms have been adjusted to create a more accurate credit scoring system. Credit scores have streamlined the lending process. Instead of an entire file to sift through, lenders can make loan offers based largely on your credit score along with several other supporting factors.
Is it harder to build credit today?
Credit building is different than it was 50 years ago, but it is not necessarily more difficult. Today, credit bureaus have easier access to the information they require. In the past, it may have been difficult for a credit bureau to track down all of your lenders, find character references and create a complete overview of your credit history. With available information, the credit bureau is able to update your credit scores on a consistent basis.
This could make it easier to rebuild your credit score. The actions you take to improve your credit score can still take time, but your dedication can pay off. If you consistently work toward an improved score, you should see results without too much hassle. In the past, it may have been more difficult to improve your score based on missing information and other factors.
In the past 50 years, lenders have streamlined the way they look at credit. Instead of reading through your credit history, lenders are able to create credit score cutoffs for many different types of loans. These credit score guidelines allow you to understand where you stand before you submit a loan application.
With more accurate information and objective scoring systems, lenders have a better idea about the creditworthiness of a potential borrower. Building your credit can be a challenge, but the systems in place today allow for your consistent efforts to be reflected in a simple format.
If you are interested in improving your current credit score, you may consider looking for a reputable credit repair service or credit counselor. Taking the time to build your score could improve your financial outlook for the future.