Credit through the Ages: Where it all Began

Exploding volumes of data and staggering advances in analytics and technology provide financial institutions with limitless opportunities to assess and predict consumer financial behavior. Financial institutions use this insight to inform credit decisioning, acquisition and account management strategies. But where did it all begin? Just where did the concept of credit get its start?

Join Equifax and Visual Capitalist as we journey through time and explore the evolution of credit. In this three-part series, we’ll visit the earliest days of consumer credit to better understand how the credit system has evolved over time. We’ll then explore the impact on consumer credit of present-day analytic techniques and machine learning. And finally, we’ll journey into the future and share a sneak peek into consumer credit decisioning, acquisition and account management strategies of tomorrow. Are you ready?

Part 1: The History of Consumer Credit

Today, financial institutions use credit reports to inform decisions about housing, employment, insurance and utilities deposits. Consumers and businesses alike rely on forms of credit. They buy many big-ticket items (homes, autos, appliances, and vacations), as well as everyday goods (groceries, clothing and medicine). But where did this system of credit all begin?

To understand our modern-day system of credit, we need to take a step back in time. Our journey starts over 5,000 years ago in Sumer where it is thought that consumer loans make their first appearance for agricultural purposes[1]. Fast forward 1,700 years to Babylonian times when The Code of Hammurabi is written, formalizing the first known laws around credit[2]. They establish maximum interest rates, and now a public official must witness loans and record them as a contract to be legally valid.

Fast-forward a few thousand years more to 800 AD and the fall of the Western Roman Empire. Under Charlemagne’s rule (768-814 AD), the Church bans usury for all laymen and economic activity grinds to a halt[3]. As we skip ahead a few more years to 1787, English Philosopher Jeremy Bentham writes “A Defense of Usury,” a treatise arguing that restrictions on interest rates harm the ability to raise capital for innovation[4].

Retail Credit Company is Born

As we head into the early 19th century, the roots of our modern day system of credit reporting take hold when a group of English tailors come together to swap information about customers who fail to settle their debts[5]. Crossing the pond, the oldest of today’s three major credit reporting agencies in the U.S. – the Retail Credit Company – is established in 1899, compiling an extensive list of creditworthy customers[6]. Today, we know the company as Equifax.

In the 1950s-60s, credit records were maintained on index cards stored in filing cabinets[7]. In 1964, The U.S. Association of Credit Bureaus studies the application of computer technologies in credit reporting. Around this same time, credit application forms become standardized[8]. In 1970, the Fair Credit Reporting Act is passed in the U.S., establishing a standard legal framework for credit reporting[9]. Finally, in 1989 credit bureaus introduce credit scoring, quickly becoming a standard system to measure credit in the U.S.[10]

This system of credit scoring remains largely unchanged. However, there are great advances in analytics and technology leading the way to improved credit decisioning. In part two of our three-part series, we’ll discuss how those advances impact credit decisioning, acquisition and account management.

To discuss the future of consumer credit with one of our experts, contact us now, or read more about alternative data, trended data and neural networks at www.equifax.com/business/.

This is part one in a series of articles on the evolution of credit, based on a three-part infographics series with Visual Capitalist.

 Sources: Visual Capitalist

[1] Quantum Future Group (http://cof.quantumfuturegroup.org/events/5461)

[2] Armstrong Economics (https://www.armstrongeconomics.com/research/a-brief-history-of-world-creditinterest-rates/3000-b-c-500-a-d-the-ancient-economy/)

[3] The Guardian (https://www.theguardian.com/notesandqueries/query/0,5753,-1030,00.html)

[4] New World Encyclopedia (http://www.newworldencyclopedia.org/entry/Jeremy_Bentham)

[5] Denver Post (http://www.denverpost.com/2005/08/08/credit-gets-closer-look/)

[6] Time (http://time.com/3961676/history-credit-scores/)

[7] Philadelphia Fed (https://www.philadelphiafed.org/-/media/consumer-credit-andpayments/payment-cards-center/publications/discussionpapers/2002/CreditReportingHistory_062002.pdf)

[8] New Research in Corporate Finance and Banking – Biaise, Bruno; Pagano, Marco (http://bit.ly/2xqx2zc)

[9] The Balance (https://www.thebalance.com/fair-credit-reporting-act-of-1970-1947567)

[10] MyFico (http://www.myfico.com/credit-education/credit-score-versions/)