What do US Congress members, Mark Cuban, and Kim Kardashian have in common? Probably not much, except that they have all recently spoken out on the topic of credit. Your credit score plays a major role in your financial life and can affect everything we do from the loans that you can obtain to the types of credit cards you can apply for — even to the home we can qualify for. In other words, our future is built around credit. How did we get here?

Before the emergence of credit bureaus, there wasn’t an enforceable standard of credit risk. Borrowers were able to borrow from lenders despite not being able to pay back their debts. At that time, there wasn’t a way for lenders to monitor, assess, or report a borrower’s credit risk, and lenders thus wasted money, time, and resources. Soon enough, the demand for protection of these lenders grew; after all, lenders are businesses and need to make money too. This is why credit bureaus as we know it today were established: to guide lenders in their decision-making and to protect them from risky borrowers.

The History of Credit

In 18th century America, your creditworthiness was based on word-of-mouth and human judgment. If you asked your neighbour if you could borrow ten dollars with the promise of paying them back the next day, along with some baked goods to return the favour, they may agree to this. Whether they’ll be happy about it, however, depends on whether you comply. If you fail to carry out your word, your neighbour might resent you, and even worse, warn the community about your unreliability. Before credit bureaus, hearsay was what determined whether you could be trusted to repay a debt.

Without a standardized system in place to assess and enforce creditworthiness, human biases also come into play. Lenders could allow their emotions and prejudices to guide their decision-making. If you applied for a loan at the bank, the lender may not make their decision based on your credit history, but instead, on their impression of you as a person. Why wouldn’t you lend to someone who was well-spoken, likeable, and similar to you? It didn’t help that there were few consequences for lending based on emotion. Soon after, people realized the need to replace a system dependent on human judgment with one that was impartial and unbiased.

"Without a standardized system in place to assess and enforce creditworthiness, human biases also come into play."

A Capitalist Affair

In the early 19th century, the rise in the global economy combined with substantial developments in creditor legislation prompted the need to standardize credit assessment. Lewis Tappan, a merchant in New York City, co-owned a cash-based silk trade company with his brother, Arthur. The cash-only business model was informed by his Christian beliefs; Tappan thought it would be sacrilegious and unethical to charge interest to his customers for credit purchases. During the rise of the abolitionist movement, Tappan joined the national fight for the emancipation of slaves. Pro-slavery merchants were not pleased and were successful in boycotting Tappan’s business, and he was forced to consider alternatives to offset the boycott. It was at this time that Tappan had his "aha" moment, and he realized that incorporating credit was the only sustainable way to remain profitable.

With the help of his abolitionist network, Tappan began to solicit information from correspondents, reviewing his customers’ characters, and offering reports to the community based on this data. In 1841, Tappan founded the Mercantile Agency, one of the first companies to systematize a company’s creditworthiness. In 1864, Mercantile Agency merged with Bradstreet Company to form Dun & Bradsheet, which pioneered the translation of credit data into an alphanumeric system. Borrowers now had a financial identity – a concept inconspicuously born out of the abolitionist movement and the rise of American capitalism.

So What Does a Credit Score Tell You?

Given the complexity of credit’s beginnings, it is critical to understand what credit has become today. On paper, your credit score is a three-digit number that tells lenders how risky you are as a borrower. It operates on a scale of 300 to 900 where a lower number indicates a higher risk, which is the risk that you will default on your debt repayments. By industry standards, anything below 619 is considered subprime, 620-679 is near prime, 680 to 739 is prime, and anything above 740 is super prime.

To calculate your credit score, credit bureaus assess the information in your file, including your credit accounts and payment history. Lenders look at this number to determine how risky it is to lend to you, and interest rates are then calculated based on your credit score. Thus, the lower your credit score, the less likely you will be able to repay a debt on time, and the riskier of a borrower you will be, in the eyes of the lender. As such, your credit score is by far one of the most powerful numbers in your financial life. Whether it should be used in the rental industry, however, is a topic for a later time.

Naborly has partnered with industry credit leader Equifax to use an individual’s credit score with AI and machine learning to determine if they are able to pay future rent payments on time. Click here to receive your free credit score and report today.

Works Cited


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