The Evolution of Credit Reporting – Traders, Bankers, Direct Lenders
The biggest reason behind rejected loan applications today is cited to be “credit score”. Conventional lending sources resist from lending money to people with poor credit scores. In fact, even if everything on your loan application is at par with the bank norms, it can still be disapproved on the sole basis of having a less-than good credit rating.
There are no dual opinions about the fact that credit scores pose a headache to all borrowers. But wouldn’t it be a relief to know that this problem has been faced by others since aeons? Thousand years old ancestors had credit and credibility into their monetary or barter exchanges.
As might be the guess of most people, this credit reporting system is not a gift of technological revolution. It has been prevalent in business since 5000 years now. Surprised?
Back from Babylon, the mention of the word ‘credit’ is prevalent is historical documents. Here is a very exciting timeline of its evolution.
Babylon (1800 BC)
Written back in 1800 BC, The Code of
Hammurabi was the first guide known to contain laws regarding credit. According
to the legal laws, loans would only hold validity if they were witnessed by a
public official and recorded as a contract.
Hammurabi also set the maximum interest rate limit for lending. As per the records, a ceiling of 33.3% and 20% per year was imposed on loans of grains and silver respectively.
The Roman Republic (50 BC)
If the notes of Cicero were to be believed, he used credit to complete the purchase of 625 acres of land. The total amount of transaction was 11.5 million sesterces! The exorbitant cost seems to provide evidence to the borrowed credit theory.
Consequent to the collapse of the Roman Empire, The Church held a
lot of power. The Holy Bible was strictly followed, and its words were taken
According to Luke 6:35, men were supposed to lend and expect nothing in return. The Church thus banned interest rates on loans.
For a long time, the borrowing and lending business faced small
changes. After an era of reformation, credit laws were once again brought back.
The first law was introduced by Henry VIII, who imposed the new cap on legal
rate of interest as 10%. England was the first country this happened in.
It was in 1787 England that Philosopher Jeremy Bentham focused and brought up the need to remove restrictions from money market. He argued that new business ventures could only evolve if funds were sufficiently and conveniently made available to people, and also that as long as there were restraints over ease of doing business, it was very difficult for money-minded people to develop new ways of expanding businesses.
English Tailors (1803)
With time, credit borrowing became quite famous in England and neighbouring areas. But it remained a personal affair. Businessmen only lent money to the people they knew or those who held a good reputation in the lending market.
However, this limited approach posed many problems. Personal grudges
began degrading one’s standing in the community, and first timers were not
given loans easily.
It was in 1803 that a group of London Tailors came together and began to hold meetings to discuss borrowers (mentioning who paid back and who did not). They realised that working together as a team was beneficial for each of their businesses. The idea of sharing information on a common platform seemed to be highly prospective and spread like fire.
Many other business holders started this practice among themselves. The word of mouth was established as a source of reliability.
The Manchester Guardian Society (1826)
In 1826 Manchester, ‘The Society of
Guardians for the Protection of Tradesmen against Swindlers, Sharpers and other
Fraudulent Persons’ was formed (Yes, the name was this long!). A monthly
circular was circulated among all members containing the list of defaulters. The
information about the borrowers who failed to repay their debt was supposed to
be spread out among the other lenders.
This vocal credit reporting system was still inaccurate and was often based on hearsay. For this reason, the name of the society was changed to The Manchester Guardian Society in 1827, and also included a ‘data accuracy officer’. This person was responsible for confirming the facts and figures before they were circulated around.
Retail Credit Company (1899)
The whole practice of informing on bad
borrowers, soon took a shape of business. By the end of 1900, there were about
50 credit reporting agencies operating around the world.
One of these was the Retail Credit Company set up in 1899. This was started by Woolford brothers, who would compile the details of creditworthy customers including some of their personal details, and would then sell the information to the lenders at a price. This company was what we know today as the Equifax credit bureau.
Automated Scoring System (1950s)
Two mathematicians, Bill Flair and Earl Isaac devised an automated scoring system for calculating the credit score of a person. The idea though did not appeal to the lenders very much in the initial years. However, after a few years, the credit agencies soon bought the idea from these two and created their own credit scoring systems.
Bankers (1958 – 1963)
Banks were now fully operational and took
great help from the credit reporting agencies. Soon, they were conducting their
lending services based on the credit data of the customers. They accepted the
information generated by credit bureaus and relied upon them while approving
The rising involvement and need of the banks led to the emergence of major credit bureaus in the world financial market.
This infamous credit bureau used throughout the UK today, was actually formed after buying out the then largest credit bureau TRW Information Services. The Experian credit rating system is used by maximum lenders in the UK today. The scores of this system are used to categorise a person into a poor, good, very good and excellent, very bad credit score holder.
Fair Credit Reporting Act (1970)
Since everything in this world has to be regulated, the FCRA was passed to set norms for credit score systems. The Act stated which information could or could not be used while calculating the credit score of a person. Not just that, it also laid guidelines for how long the data could stay in a credit report and how an individual could obtain copies of his or her record. The norms were a set of rules and regulations that need to be followed while deciding and sharing the credit record of an individual.
Direct Lenders (21st Century)
With time, banks got stricter about
adhering to credit reports of the loan applicants. While inflation around the
UK rose, wages stayed almost stagnant. This led to the emergence of the FinTech
industry in the UK.
The online lenders offered small loans to people with all types of credit scores. Borrowers finally got an option to rely upon during their times of need.
From civilisations to tradesmen, from bankers to direct lenders; it has been a remarkable evolution for the credit reporting system around the world. It is what it is today due to the continuous changes through the years.
Description: All of us have heard about credit scores. But everything in the world today has a story behind its existence. The credit reporting system has an exciting revolution of its own.