Have you ever wondered how it came about that credit scores gained the power that they have? Here’s a brief outline of the evolving role of credit agencies in our society:
The beginnings of credit reporting
Long before any official credit reports existed, a person’s credit simply consisted of their local reputation: Were they generally a responsible citizen? Did they meet their commitments and obligations? Neighbors and merchants would make decisions about letting someone delay payment for purchases based on what they knew — or had heard — of that person’s reputation.
As society became larger and less gossip-based, local groups of merchants (known as “mutual protection societies”) began pooling what they knew about individual consumers in informal written records. In the 1830s, this information began to be stored centrally, by separate franchised businesses which existed solely for this purpose. These businesses shared information only with merchants and with each other, but never with the consumer. In the days before computerized data systems, your credit report remained somewhat local; if you moved to a new region, you had a clean credit slate.
Modern credit bureaus
The various franchises gradually narrowed down into the big three credit reporting agencies, which handle almost all credit reporting today: Equifax, Transunion and Experian. Of these, Equifax is the oldest, formed in 1899 to keep customer records for a local retail grocers’ association. Each of these three companies (or “bureaus”) keeps a cumulative report of your financial behavior, which contains information on the following topics: Your payment record on bills, how much of your available credit you are currently using, the type of credit you have (credit card, mortgage loan, auto loan, etc.), the length of your credit history, and how many times a business has requested your credit score recently.
Credit report vs. credit score
Each of the three credit agencies keeps a separate report on you, and these reports may contain different information. You can request a free copy of these reports once each year by going to this federally mandated website or by signing up for a truly free credit score service like Credit Sesame. If you want to monitor your credit reports more closely, you can sign up for credit report monitoring services that can also help protect you against identity theft. While it’s important to look at your credit reports and make sure they are accurate — and to dispute anything you see on the report which is not accurate — it’s also important to know your credit score. You must pay for receiving your credit score, however. The federal website mentioned above provides information on how to do this.
How credit scores are used
Credit scores range between 300 and 850, with anything over 750 considered “good” credit. A high credit score allows you to qualify for loans with lower interest rates, and these days it turns out to be important in numerous other areas of your life as well. Potential landlords will often check your credit score before deciding whether to rent to you, and employers and insurance companies even make decisions based on credit score. The expanding use of credit scores is somewhat controversial, but for now your best approach for a healthy financial future is to remember to pay each bill on time, and try to keep your credit card balances well below their limits.