What Effect Did Credit Scoring Have at First?

Credit reporting began when small retailers shared information about their customers. As the system developed, credit bureaus emerged and the system begun adopting a formal statistical method to determine people's risk profiles. The credit scoring system has various effects when it first appeared.

Information Sharing

Even in its first stage, credit reporting provided small merchants with a way to share information about customers. The financial information allows the merchants to determine whether it would be risky to do business with specific individuals. In an informal way, they shared information about people's risk profiles and made business decisions based on the data. This resembles the way credit scoring works in a more formal system today.

Irrelevant Information

Credit reporting bureaus used to collect all types of information, including details that don't concern people's financial situation and behavior. For example, they gathered information pertaining to people's lifestyle, including sexual orientation and cleanliness. This led to a controversy in the 1960s because businesses used such information to refuse to provide services and opportunities to individuals based on prejudice against certain types of behavior. The incident led to the Congress passing the Fair Credit Reporting Act in 1971.

Reluctance

Not all businesses take up the credit scoring system initially. Notably, banks were reluctant to use the statistics-based calculations that produced people's credit scores. Lenders preferred to continue allowing their loan officers to personally determine whether to deal with particular customers. This was due to the complex calculations that went into credit scoring and the banks not understanding the system. The system also makes it difficult for banks to have the final say on whether to do business with certain individuals.

Spread

Credit scoring system spread despite some early reluctance on the part of certain businesses because of its efficiency. The system allowed businesses to quickly, cheaply and accurately predict whether customers would handle debt responsibly. The system's spread accelerated in 1974 because the cheap screening process made it less expensive for banks to issue credit cards. It spread even faster in 1995 when Freddie Mac told other mortgage lenders about the benefits of using the credit scoring system.