Today’s system of credit reporting and scoring works nearly seamlessly to provide potential lenders, employers, landlords and others with the information they need to make various types of decisions. However, it was not always as smooth or as transparent of a system as it is today. The credit reporting and scoring system of today has evolved from loosely organized local exchanges of information between interested parties, primarily for the benefit of creditors and lenders, to a system that is beneficial to all parties involved.
Credit reporting was born during the 19th century, when small retail merchants traded financial information about their customers. These "merchant associations" eventually organized into small credit bureaus. In the early days of credit reporting and scoring, as the 19th century came to an end and the prosperity heralded in by the second wave on the Industrial Revolution settled into the middle class, it was an informal system of information exchange between local retailers. As the 20th century began to take hold, it was shaped by modern era inventions in transportation and communications, such as the automobile and the telephone. In a sense, as these became more common, the world became a smaller place. People could travel farther to do business and creditors could easily share information throughout a broader region.
As communication technology continued to develop, these loose-knit organizations began to solidify into fledgling credit bureaus. The advent of the computer launched the modern day credit bureau, permitting vast data storage and information sharing with a quickness and ease that was just not possible before. Smaller, more regional credit reporting bureaus merged, and continued their merging until the credit reporting giants of today came into being, with Equifax, Trans Union and Experian being among the best known.
As the credit bureaus themselves evolved, so did their importance in the lives of the average person. That made the information collected and how it was used much more critical than in times past, when limitations in communication and information exchange prevented a credit report or score from shadowing a person throughout their day-to-day life.
In the early days, all sorts of information was collected and recorded, not just financial. Intimate details of personal lives, such as divorce and even dating behavior, health, drinking habits, and sexual orientation were collected from many sources, including newspapers and local gossip. Furthermore, because the whole concept of credit information exchange was developed to benefit creditors, lenders, retailers, etc., the private citizen had no right to access, no right to even know what was on their credit report. As credit bureaus became national and information almost effortlessly exchanged from coast to coast, the influence of the credit report on the lives and opportunities of average citizen became much greater.
Advocacy groups formed and began to address consumer rights, and were successful in achieving legislative change in 1971, with the Fair Credit Reporting Act. Before, only negative financial information was recorded, but with the Fair Credit Reporting Act, positive information also had to be added to the record. The consumer won the right to view their entire credit report, as well as to dispute errors and have the credit report corrected. Furthermore, significant rules about privacy and the types of information used, as well as concerning how information was used, came into being. But, these reforms still left the information that consumers could access about themselves incomplete. In 2001, the final veil of secrecy was lifted, with legislation being added to allow consumers the right to view their credit scores. Today, all credit reporting and scoring information must be provided in a timely fashion and at an affordable rate, with many being eligible to receive that information free of charge.
Today’s credit reporting and scoring systems have evolved right along side of our society and modern economic system. As the rise of modern transportation and communication affected how and where people conducted their business, credit bureaus responded to an increasingly mobile society by coming together to extend their reach throughout the nation. As the information age came into being, and the power that the credit reporting bureaus had over the day-to-day life of a person grew, legislation arose to bring about the balance of power we have today, allowing credit reporting agencies to be beneficial not only to creditor and lenders, but also to the consumers themselves.