Yes, credit scores matter. But simply saying they do doesn't move the conversation forward for many consumers. Understanding what's behind the most talked about three digits in personal finance is necessary if you hope to improve your lifestyle and save money. So, let's start by learning about the history of credit scores and why they still matter today.

What is a Credit Score?

A credit score is a numeric summary of the information detailed in your credit history report.

While creditors and lenders typically report your payment activity to at least one of the major credit reporting bureaus: Experian, Equifax, or TransUnion, most credit scores are calculated by credit scoring agencies, like FICO® and VantageScore®. Generally, scores range between 300 and 850. The higher the score, the lower the perceived credit risk.

Your credit history report will also influence credit-based insurance scores. Insurance companies use certain information in your credit report to help predict the likelihood that you'll file an insurance claim. This is why most automobile and home insurance carriers will check your credit before providing a quote or issuing an insurance policy.

When Did Credit Scores Originate?

The history of credit reporting bureaus and credit scoring agencies date back to the 1800s.

Experian's roots date as far back as 1803 when London retailers began recording and sharing information on customers who failed to pay their debts. The bureau has ties to various individuals and companies, including Jim Chilton who founded one of the earliest U.S. credit agencies in 1897.
In 1899, two Atlanta, Georgia brothers, Cator and Guy Woolford founded Retail Credit Company (Equifax).

TransUnion, created as a parent company of Union Tank Car Company in 1968, acquired the Credit Bureau of Cook County and their 3.6 million consumer card files.

Each credit reporting bureau used a manual process to record the creditworthiness of people in their system.

A shift to a quantitative measurement of credit risk that relied on data analysis took hold in the 1950s when an engineer, Bill Fair and a mathematician, Earl Isaac, founded Fair Isaac (later known as FICO). Lenders and retailers around the world began using their automated credit scoring system.

Credit scores helped replace a subjective evaluation of credit risk that relied heavily on character references, home visits, and other factors not used today. The new credit scoring system put more focus on an applicant's ability to repay a debt and less on their reputation.

In 1970, the federal government passed the Fair Credit Reporting Act. This helped standardize and improve the accuracy of the data recorded in credit history reports.

In 1989, FICO® Score was introduced to the world. It was designed as an impartial tool for interested parties to evaluate an applicant's credit risk.
In 2006, VantageScore was founded as an alternative to FICO. The joint venture between the main credit reporting bureaus: Equifax, Experian, and TransUnion, was designed to provide lenders and other entities with another source of consumer credit scores.

How is a Credit Score Calculated?

Each agency's credit scoring formula is kept under wraps but they publish a list of credit behaviors that influence the scores.

On-time bill payment
Amount owed on credit balances
Age of credit accounts
Variety of credit accounts
Number of new credit accounts

The weight of each credit behavior will vary based on the agency and the scoring models used by lenders. FICO assigns a percentage to each category while VantageScore assigns each category a "level of influence". For example, "Total Credit Usage, Balance & Available Credit" are labeled "Extremely Influential".

Why Credit Scores Matter

Your credit health affects how much you pay for everyday services, impacts where you live, and could even determine whether you secure your dream job. Creditors, insurance carriers, landlords, utility providers, mobile companies, and employers aim to limit risk. Some will use your credit history report or credit scores to decide if you're likely to fulfill your obligations as a customer, tenant, or employee.

You're more likely to experience greater lifestyle freedom when you have a better than average credit score. For example, many consumers with high credit scores tend to pay lower interest rates on financed purchases and are not required to pay security deposits on products or services.

How Can I Raise My Credit Score?

There are several things you can do to improve your credit score. Since your score is based on the data found in your credit history reports, ensure they stay error-free. Order a copy of each report from AnnualCreditReport.com. You are entitled to a free report from each of the major bureaus every 12 months. If you find inaccurate information in the reports, follow each bureau's dispute policy to have errors removed from your record.

Paying bills on time and carrying no more than 30% of your available credit balance from month to month are the two best ways to improve your credit. These two credit-based activities have the greatest influence on your credit scores.

When you change your credit behavior, you change your credit score.

If you need help rebuilding your credit or making sure you're on the right track with your current financial plan, contact GreenPath Financial Wellness for assistance.

As a Together Credit Union partner, they can help you review your credit reports and create a specific plan of action to improve your credit score. Request a free financial counseling session with GreenPath today!