Private Eyes and Gossip, The Weird History of Credit Scores

Credit Mike Stewart AP

I have a slight confession to make. I don’t believe in credit cards or debt.

To be clear. I understand they exist. I don’t think they are like sasquatches. I just don’t believe in going into debt.

With obvious exceptions. I don’t have a cool half mil lying about to buy a house. But for everything else in my life. I’ve very much gone by the idea that if I can’t buy it outright then I can’t buy it.

As an Australian this isn’t a big deal. There’s lots of young Australians who don’t involve themselves in debt till they have too. But I still remember the first American I told about my hatred of debt.

I was on a train to California. “What do you mean you don’t have a credit score?!” He said it like I had just slapped his mother.

Credit scores are so ubiquitous in the US that it is difficult to buy a phone without one. I tried to rent a car once and you should have seen the cashiers face when she realized I was trying to rent a car with a debit card. They rented me the car but put a $500 hold on the card just in case.

Credit scores have infected almost every avenue of modern life from getting a job to renting an apartment.

But what even is a credit score? And where do they come from?

At it’s simplest a credit score is just a number based on a person’s finances and previous debts that tries to quantify how reliable a person is at paying off their debt and how profitable they are for the debt seller.

Pay off your debts in time and it goes up, miss payments it goes down. Pay early and it goes down… because it’s a number by and for those who sell debt. Paying off your debt too early isn’t desirable for them.

A high credit score gives you access to higher lines of credit, lower interest, more jobs, apartments, better insurance, while lower credit scores the opposite

The modern ubiquitous credit scores that will follow you through till death were invented way way back in 1989 by FICO.

And believe it or not I can’t tell you how your score is measured because it is a secret.

FICO which stands for Fair Issac and company. Is a private data analytics company and the largest credit score provider in the world.

Though they keep their methods secrets, they have released completely unverifiable public disclosures claiming that they calculate scores based on:

35% Payment history

30% Debt Burden

15% Length of credit history

10% Types of credit held

And 10% searches.

Why did I add so many qualifiers before these percentages… well we’ll get into that in a moment.

There are many different credit scoring companies but they all use similar metrics to assess your value to sellers of debt.

So where do credit scores come from? Was it a cocaine fueled fever dream of the 80’s?

I mean yes that probably did happen. But the credit score has far older and weirder roots than Reaganomics and the Clinton era.

So let’s jump in our time machine to travel back about 150 years to the birth of modern society.

The word credit comes from the Latin he she it believes. So literally your credit means how much someone believes in you.

Your credit or line of credit essentially just means how much someone financially trusts you. Today the term credit is usually used when referring to a small to mid-scale short term loan.

Loans and interest stretch back thousands of years and the first written records of financial loans are found in the code of Hammurabi from the 18th century BCE. However today I want to talk about credit and credit cards as we today understand them.

It might seem logical that buying with credit is a modern concept in terms of pure dollar value. Debt is at levels never seen in history. But in some ways we buy less on credit today than ever before.

See during the 19th and 20th century virtually everything could be bought on credit, and virtually everyone dealt in credit from your grocer to the local publican.

Why? Well like today people didn’t like walking around with vast quantities of cash on them. Also unlike today hard cash was often hard to come by coin shortages plagued many growing societies through history.

This form of unofficial credit is probably as old as humanity. However records of it prior to the modern world are scant.

Who was allowed to buy things on credit when every business needed to make a personal decision and skipping town was easy made issuing this kind of trust or credit fraught with difficulty.

Local businesses would generally only provide credit to those they knew. People with roots in the town or neighborhood who were unlikely to try and scam you out of a free drink or bag of groceries.

Though this small-scale debt bore little resemblance to credit as we understand it today.

Where our modern understanding of credit, the credit card and the credit score comes from is from humble origins in the 18th and 19th century.

Beginning in the 18th century certain entrepreneurs began experimenting with a new kind of store. A store that sold everything. A store that didn’t just sell fabric, or hardware, or cookware But one with separate sections each section acting like its own department. A department store if you will.

Now who invented the first department store is a surprisingly fraught question. But between the late 18th and early 19th century various people began experimenting with larger less specialized shopping centres.

One of the first of what we today recognize as departments stores was Harrods in London established in 1824 by Charles Henry Harrod as a haberdashery, the young Harrod expanded his store from fabrics into groceries, stationary, medicines, and perfumes, finding success in each venture.

Between 1824 and 1883 he would slowly build a retail empire. And conglomerate his businesses into a series of buildings in Brompton. And when his mishmash of stores caught fire in 1883 it gave him the opportunity to build the first purpose built department store in the world.

Around the same time Harrod’s became one of the first places in the world to begin formal issuing and formalizing lines of credit to their regular customers.

In the late 19th century issuing lines of credit became the norm for department stores. And a formalized credit system began to evolve. This began with paper credit. Initially just a piece of paper, or cardboard identifying the bearer to make easier the tracking of what they had bought and how much the store trusted them.

These credit papers and charge cards spread to businesses that dealt with high value purchases around the world from department stores, and hotels to oil companies. These credit chits took the form of everything from Plastic buttons to metal cards. And all of them usually involved the person’s name, signature and the number of their account Identifying the person as having their own personal line of credit at that store.

Now the main problem with this system was trust. It worked perfectly well for aristocracy, the wealthy, respectable business owners and for people you knew personally.

But the cost of making a mistake could be disastrously high. Without computers, tracking fraudulent purchases and con-men who skipped town was nearly impossible.

However rewards were also high. Businesses would have quickly realized people spend more on credit than they do on cash. And with western economies booming and demand for credit skyrocketing the demand for a solution was also high.

But the limitation for this credit chits was you couldn’t only use them in one store.

Though charge cards and credit chits had exploded in popularity after 1885 it wasn’t until 1951 that the first of what we would today recognize as a credit card was born.

In 1949 Frank McNamara was eating at Major’s Cabin Grill in New York when he realized he had forgotten his wallet. He “came up with a solution” but was determined never to be that embarrassed again.

What if there was a charge card like a department stores credit chit. But one that was backed by a financial institution instead of a store, so you could use it in anywhere?

Over the next two years McNamara secured funding for a new charge card venture, christening it the Diners Club.

And in 1950 he returned to the Majors Cabin Grill and paid with a credit chit made from cardboard and a signature. A literal credit card. Unlike a check this charge card meant a business put trust in the diner’s club instead of in your personal finances.

This embarrassing meal is known rather grandly within Diners Club as the first supper.

This charge card was a revelation. Initially only targeted at restaurants in the New York area the business only convinced some 27 restaurants to participate. But the enthusiasm for the idea was huge.

By the end of 1951 the business had grown from 200 members to 42’000 and by 1965 it had over 1 million card holders.

The diners club quickly expanded it’s reach from restaurants to hotels, to everywhere. It’s major target was the growing travelling class in the nation.

Up to this point credit chits had only ever worked locally within your city, or at most your region. You bank was not much more help because most banks were also local.

But by the 1950’s with the growth of the automobile, a mobile new generation of consumers was crisscrossing America.

The need for a generic charge card was suddenly blindingly apparent. With the post war boom in interstate travel the market was enormous. American express followed next in 1958 it’s gimmick was it funded travel and entertainment.

And in 1959 American Express issued the world’s first plastic credit card.

Established banks decided to get in on the action shortly after, and the precursors to both Visa and Mastercard were formed as alliances between various banks.

And the modern credit industry was born. Though it wouldn’t be until the neo liberal deregulation by Reagan and Clinton in the 80’s and 90’s that the current debt economy was truly born.

But let’s take a step back to those first humble origins of the diners club card. During the 50’s the cost was low. $5 annual membership and 7% from participating businesses.

But prior to computers that still left the question how do you vet people you give these cards to? Because at this point skipping town is still a viable strategy of escaping debt.

The answer was the credit score.

Today skipping out on your debts is almost impossible. Thanks to computers your financial records can be tracked across multiple banks, phone companies, even the court system creating a terrifying dystopia of permanent surveillance that is one government change away from permanently destroying all past concepts of freedom… I mean a wonderful opportunity to prevent minor fraud.

However, prior to the 80’s credit scoring still existed though in a slightly different form.

The credit scoring system had roots in the late 1800’s credit boom. With the credit boom came the associated industries. Entrepreneurs who offered businesses a simple assessment of trustworthiness of potential creditors.

In 1899 two Atlanta based businessmen Cator and Guy Woolford formed the Retail Credit Company, to help track credit worthiness of potential charge card holders and assess insurance claims in Atlanta, Georgia. It was one of the first proto credit score companies in the world.

The demand for this business was huge and the company spread throughout the USA and Canada. Maintaining assessment files on millions of people.

If your grand parents or great grandparents, bought a car, or took a loan it is likely there was a dank basement in Atlanta with a massive roller draw containing their names.

And department stores across America and Canada began to rely heavily on the Retail Credit Company to assess new customers for credit worthiness.

Though the company’s main business was assessing insurance policies. So how did these venerable companies assess people?

Surely through nothing but the staunchest and most rigourous scientific methods. Let me just reach through time for a moment to pull your great grandmothers credit report out of the RCC vault.

Miss Jenny Smyth, took two loans paid in full, full time employed, good income, one child, hmm ok all good so far… was at home on the 26th of February at 11 am… ok that’s a bit creepy… neighbour says she is a slag… possible alcoholic… no husband… untrimmed grass… don’t like her hair… maybe a communist…high credit risk… what the hell?

Let’s just say the RCC conducted extremely… personal studies of their targets, sending out private investigators to dig through peoples lives.

Things which affected your credit worthiness included, the cleanliness of your yard, rumours about your marital status, and whether you answered the door on a weekday, you work shy git.

Unsurprisingly race, gender, political affiliation, and sexuality all became part of this witchhunt and all counted against your application.

Yes the super secret credit scoring system was basically… wild bs. And based on nothing more than superstition prejudice and appearance.

The wild speculation got so bad that the FICO system which we mentioned earlier was founded in 1956 by an engineer and a mathematician precisely to combat this rampant unscientific scoring that had been going on in an attempt to create an impartial score of credit worthiness.

Thankfully these witch doctors of credit like RCC were soon outed for their ridiculous systems.

In 1970 the US Congress passed the Fair credit Reporting act which exposed the data the RCC had been using to assess people. Giving further strength to the growth of the new mathematical scores used by groups like FICO.

Thank God.

Just 5 years later the RCC changed its name in disgrace going into a long and deserved slide into ignomy never to recover. It became a little rinky dink operation called, let’s see Equifax. Never heard of them.

Well at least there’s FICO. Who use incorruptible mathematical formula's to calculate your score. And who does the data they feed into this formula come from? Equifax.