Where Did Credit Reporting Come From, and Why is it So Powerful Today?

Whether you’re signing up for your first-ever credit card or applying for a mortgage, your credit score plays an important role in determining whether or not you’ll be able to reach many of your financial goals. Your credit report and that three-digit credit score number can also make a big difference in how much interest you’ll have to pay on loans as well as the types of loans or credit cards you’ll qualify for.

Credit reports and credit scores as we know them today are a part of a long history of merchants and lenders collecting information and using it to evaluate whether a potential borrower would be able to pay their loans back in full and on time. 

Select spoke with Josh Lauer, associate professor of communication at the University of New Hampshire and author of “Creditworthy: A History of Consumer Surveillance and Financial Identity in America,” to understand more about how credit scoring and credit reporting came to be, and how both eventually became such an important part of our lives.

Before there was credit scoring, there was commercial credit reporting. Unlike consumer credit reporting, where individuals are evaluated for their credit risk level, commercial credit reporting was originally used by merchants to evaluate the creditworthiness of potential business customers. 

In 1841, the Mercantile Agency was founded as one of the first commercial credit reporting agencies, using people known as correspondents to collect information about lenders and borrowers across the country. In a way, it functioned a bit like a modern-day credit reporting agency, collecting information about a businessperson’s marital status, ethnic background, credit history and age, which was then entered into a ledger that was centralized in one location, New York City. 

This type of credit reporting relied on subjective methods of evaluation — in other words, correspondents would provide evaluations of people based on their racial background, gender and moral character.

It wasn’t until the late 19th century, when department stores and mass retailers gained popularity, that consumer credit reporting really took off. 

Some mass retailers were installment houses, which would sell items such as furniture and drugs to customers via installment loans. The retailers needed a way to attract consumers and ensure they would be paid back, so they collected information about their customers and submitted it to a local credit bureau.

While there are three major consumer credit bureaus today — Equifax, Experian and TransUnion — it would in fact take hundreds of years to develop a national centralized credit bureau.

It wasn’t until credit reporting became computerized in the 1960s that the industry would become consolidated. 

In the 1960s, there were more than 2,000 credit bureaus across the U.S.. Over the course of the next 20 years, that number would shrink to five and, eventually, to the three major credit bureaus that exist today, Lauer explains.

“Before [the 1960s], all the files were in filing cabinets, on papers and cards,” says Lauer. “So we have these bureaus that have lots of money. They come into a town and buy up all the local credit bureaus with all [of] their information and then computerize it.”

It would take longer for credit scoring to gain widespread popularity in the U.S., however, as lenders were hesitant to give up their use of character assessments in the evaluation of someone’s creditworthiness.