Credit history, trivia -How we got to where we are
Posted 29 October 2004 - 01:55 AM
Credit bureaus operated in near secrecy, gathering information in ways you'd not believe.
Did you know that Retailer's credit (now Equifax) used to use information gathered about you from the Welcome Wagon representative? Quality of your home, furnishings, opinion of your character, etc?
Trying to see what was in you report was nearly impossible. It could be absolutely wrought with error and incorrect information- you'd never know. Even if you did know, you couldn't correct it.
Lending decisions were made partly on the content of that report, and partly- sometimes mostly- on the whim of the underwriter at the bank you were applying at. If you didn't "look right"- or were of a minority group, or lived in the wrong neighborhood. etc- forget it.
That started to change as credit cards became popular in the late 1960's. There was no way to personally interview an applicant who lived states away from the issuing bank, nor could the credit reports available at the time be relied upon. Many disasterous lending decisions were made using the information in those reports.
Meanwhile, congress had begun investigating discrimination in housing loans, and the practices of collection agents. (there's another story, lol)
The result was the FCRA, enacted in 1971 and later the FDCPA in 1977.
Here is a timeline of lending industry reforms, showing the emphasis in the '70s on cleaning up abusive/discriminatory practices:
The FCRA literally forced CRA"s to clean up their act. As the data in consumer reports became more standardized and more accurate (!) lenders began to rely more on them, less on the underwriters' gut feeling.
Lenders begain to develop their own automated risk-scoring, but the results were inconsistent and inaccurate. The often still factored in things like age, gender, etc.
Fair Isaac and company capitalized on that movement, and on the push to reform mortgage lending by compiling their risk model scoring.
Finally released in the 1980's, it was touted as an impartial, consistent way to evaluate credit applications, taking the prejudice and instinct out of the equation.
Given that lenders were under pressure from Congress to eliminate discriminatory lending practices, FICO seemed like an answer to their dilemma. They jumped on it and have never really looked back.
Many still do manual underwriting, and most employ an internal risk calculation of which FICO is only a portion.
But those '60 s and '70s lawsuits and congressional action went a long way to eliminate the prejudice that had saturated the financial industries.
FICO has been accused over the years of still factoring race, age, gender into their equations, the most common complaint is that of zip-code discrimination. I don't personally believe that any of that is used in score calculations and will leave that discussion to those who know more about it. But in a historical sense, FICO did wonders to level the playing field.
Not until very recent years could a consumer see their credit score- a remnant of that old secrecy pact.
California's SB1607 was the first law to mandate consumer disclosure of scores- in 2000!
Eloan was the first source for consumers to see their score, causing Fair Isaac to attempt to strong arm both them and Equifax back in to silence.
But the cat was out of the bag, Fair Isaac could not crawl back in to the dark days for long and eventually, under tremendous pressure, relented.
Posted 29 October 2004 - 02:08 AM
Here's the story behind inquiries, and why lenders can see them.
Inquries were not disclosed publicly on credit reports until the very late 1970's. THE FCRA requires them to be shown to you- but not to other lenders.
That practice was actually forced by a television commercial!
In the early-mid 1970's, there was a television commercial, selling a "get rich in real estate" package.
The way it worked, was you would apply for 10-20 credit cards all at once.
Since inquiries were not reported publicly, lenders had no way of knowing that you'd applied all over town, lol. Someone with an income capable of supporting 5K in credit could grab 60K in credit in a day.
You'd cash out all the cards, and buy a piece of property.
Then you'd sell it quickly (flip!) and pay off the cards, keeping the profit.
Repeat until you run into a property that does not sell......
The huge default that followed got the attention of the lenders, who pushed for the right to see your inquiries to prevent such exposure.
That was the end of that TV commercial...and the foundation of inquiries changing from a disclosure to you of who's seen your report to a factor used in lending decisions.
It was also one of the many factors resulting in the bankruptcy reform act of 1978. But that's another topic, lol.
Posted 29 October 2004 - 03:28 AM
TRW Incorporated was involved in a number of businesses, mostly defense-related, but including automotive supply and credit reporting.
At one time, TRW was the undisputed giant in credit reporting, having laid it's roots in business information then branching into consumer data.
Credit reports were commonly called "a TRW report", a practice which some old-timers continue today.
. ..In his senior year, Bill Gates and Paul Allen were looking for opportunities to use their new skills... and make some money.
The defense contractor TRW was having trouble with a bug infested computer system.
TRW offered Gates and Allen jobs. "It was at TRW that Gates began to develop as a serious programer," and it was there that Allen and Gates first started talking seriously about forming their own software company....
( Hard Drive: Bill gates and the Making of the Microsoft Empire,
James Wallace, 1993)
In 2002, Northrop Grumman acquired TRW's defense business, and TRW Automotive, became a separate company.
Goodrich Corporation acquired TRW's Lucas Aerospace group. The credit reporting business, which was sold 1996, is now called Experian.
Great Universal Stores PLC (GUS) is the current owner of Experian, which also owns the Burberry retail chain and is Britain's largest catalog retailer.
The origin of the company was in the Cleveland Cap Screw Company founded in 1901, which eventually became Thompson Products.
The 1958 merge of Thompson with the Ramo-Wooldridge Corporation was named Thompson Ramo Wooldridge Inc., then shortened to TRW Inc. in 1965.
TRW was one of the first companies to build air bags in the 1980s, but problems with the bags forced a huge recall by Ford Motor.
It was the beginning of the end of TRW.
TRW also ran into asbestos problems, having used the material in the 1970s in brake liners. Strike two....
The 1999 acquisition of the British aerospace and automotive parts maker LucasVarity saddled it with so much debt that it had to start selling businesses, with the result that Northrop Grumman was able to conduct a hostile takeover of the company, ending TRW's reign as the heavyweight player it once was.
Posted 29 October 2004 - 01:03 PM
Years ago, in the early days of our country, settlers moved to various parts of the country. As the population grew, they set up businesses, normally a general store, a tavern, and later- a bank.
General stores at the time would often extend credit to the community, people purchasing what they needed, the storekeeper keeping track with pencil and paper. As those people brought their goods to market to sell, they'd return to pay off the storekeeper.
Everyone except Edwin, that is.
At some point, now lost to history, the merchants in some town all gathered for a morning coffee klatch to discuss business. The owner of the general store mentioned Edwin, and how he hadn't paid his bill last month.
The livery owner chimed in with a similar experience.
The other store owners hadn't dealt with Edwin yet--but they'd make a note that Ed was to be cash-only should he stop into their establishment.
Edwin, at that point, was the first settler to officially have bad credit!
The shopkeepers began to see value in sharing information, and agreed to keep notes on who they were having trouble with. Additionally, they agreed to meet every so often and share that information.
Eventually, the list grew longer and needed to be written down...
The first "credit report" was thus born!.
The origins of credit reporting were keeping track of negative experiences only- those who did not pay- or paid late- a tradition that stuck with credit reporting for years, and still has an strong influence on it today.
As the settlements grew into cities, these informal meetings became more organized, eventually taking the name "mutual protection societies" .
A mutual protection society was the forerunner of CRA's as we know them today, organized to keep track of people who had burned a merchant.
Time progressed and people like Edwin became more mobile. It wasn't hard for someone with a bad rep. to pack up and move to the next town down the road.
To combat this, the Mutual Protection Societies began to join together and cover larger territories. Communications were slow years ago, slowing the expansion of the societies, requiring them to be at best- regional in nature.
Again, that regionality is a characteristic that only recently has begun to disappear.
Posted 29 October 2004 - 01:17 PM
One of the larger Mutual Protection Societies was Retailers Credit, in Texas.
Retailers credit began to realize the value in consumer information, and began to gather data that went over and above basic non-payment information.
At one point, Retailers Credit actually partnered with Welcome Wagon, adding reports from the Welcome representative to a consumer's file.
File was an appropriate term, the data was kept on a paper ledger sheet, in a file carrying your name. Rows of file cabinets contained the data, a practice unchanged until the development of mass computer storage in the 1960's.
Business was incredible for Retailers credit, although they only covered the southern parts of the country.
In the north, Merchant's Credit Guide and Credit Bureau of Cook Couty were covering the Chicago and Midwest areas.
Edwin could still move around to escape his past, but it was becoming more difficult. No longer could he move one town over....now Ed had to move to an entirely different geographic area.
Retailers Credit changed their name to Equifax, and began branching out to the west, the northwest and the southeast, setting up satellite offices to cover those parts.
That practice remains today, with certain parts of the country still using an Equifax affiliate such as CSC.
The Union Tank Car Company of Chicago, a railroad leasing company, had been keeping track of rail-related data and saw an opportunity to branch out into consumer data. Union Tank purchased the Credit Bureau of Cook County in the late 1960's, and it's approx 4 million ledger-card files.....contained in 400 seven-drawer cabinets. TransUnion was born!
TransUnion was the first to pioneer tape-based data storage allowing it to branch out and cover larger territories without the need for branch offices.
Meanwhile TRW had jumped into the credit reporting business.
TRW had it's fingers in all sorts of industries, primarily defense contracting, and military data and communications. This gave TRW access to the newest technology and computing power that the others didn't have....TRW was the first to provide credit data on demand by electronic- real-time means.
No longer having to wait for the US mail, or relying on a phone call- TRW's electronic reporting propelled it to the top of the heap, becoming the largest repository of credit information in the world.
Edwin's days of hiding from his past were over, TRW had the ability to store data on anyone regardless of geography, and provide it to anyone, anywhere in a matter of hours. They were truly the first nationwide credit data repository.
Consumer reporting was largely a USA thing, other countries eventually followed but it was years later before they caught up... many still do not compile such information.
TransUnion stuck mostly with it's original mission of keeping credit-related data only, Equifax and to a lesser extent TRW, had compiled additional personal data, and opinion, character reports, commentaries from neighbors and insurance agents....an unregulated industry gone hog-wild, lol.
It was truly a "consumer report" that Equifax provided, containing much more than mere payment history.
Secrecy was strictly kept, lenders were not allowed to disclose the content of a consumers file to the consumer....violaters were dealt with harshly, resulting in denial of access to any further reports, and occasionally lawsuits over confidential trade information rights.
The CRA's refused to make consumer disclosures.
You didn't know what was in your file, nor could you correct any errors.
The CRA"s were an industry without regulation, and consumers began to fear them, realizing the unchecked power that they were amassing.
Not until congress stepped in in 1971 did these practices begin to change, and credit information become more standardized and regulated. Consumers were finally given the ability to see their files, and to dispute errors therein.
As light was shed on the CRA's practices, they began to clean up their formerly secretive and sometimes abusive act...the FTC was given charge to keep the CRA's supervised, and occasionally report back to Congress on their progress. This has resulted in changes and amendments to the FCRA occasionally.
However the CRA's and the banking industry make for a very powerful lobby....many of the rules have been watered down from the FTC's origional recommendations under the lobbyist's pressure.
Posted 29 October 2004 - 01:45 PM
and why It's Bank of America's fault you have to go to the bank during your lunch hour
1950- the Diners’ Club issued the first credit card in the United States, useful for New York restaurant bills only.
27 restaurants accepted the card as payment.
1958- American Express first issued cards usable at various retailers, not restricted to restaurants. Not truly a credit card, charges were required to be repaid monthly.
1958- BankAmerica issued the BankAmericard (now Visa), the first bank credit card. They are Bank of America now, after merger with Nations bank in 1998. This was truly a credit card, not requiring the full balance to be repaid monthly.
1966- the Interbank Card Association was formed, later known as Mastercharge, and Mastercard. This was the first credit card that was issued by multiple banks.
1986- Dean Witter Financial Services Group introduced the Discover Card.
Sears Consumer Financial Corporation changed its name to NOVUS Credit Services Inc in 1993, and they all became Morgan Stanley following a merger in 1997.
BTW, BankAmerica is generally credited with starting "banker's hours"- closing the banks at 3pm.
Back in the 1940's, BankAmerica was the largest bank on the west coast.
Soldiers in WW2 were using the bank quite heavily, resulting in the need to close the bank at 3pm in order to process the checks by 5pm!
BA pioneered modern electronic check recognition and processing in order to cope with the volume of checks, and as a result- had significantly higher efficiency than other banks. What took many man-hours at other banks was done via automation at BankAmerica..
This efficiency and speed allowed it to expand, and in the 1970's, it became the worlds' largest banking institution.
Citibank later took that distinction, outgrowing BofA by purchasing up several smaller banks. Citibank is now being challenged by HSBC.....
Posted 27 November 2004 - 12:51 AM
If we were still on the old system and any Welcome Wagon person saw the mess in my house, I probably couldn't get credit anywhere!
Posted 24 December 2005 - 08:36 PM
Could you post some of your sources? I'm a student and interested in doing further research on a related topic.
Posted 27 December 2005 - 02:47 AM
Thanks for posting this - very interesting stuff.
Could you post some of your sources? I'm a student and interested in doing further research on a related topic.
I wrote that a year and two computers ago, lol. Some internet sources, some conversations with others who are history nuts, some general reading.. If there are specific areas you'd like sources on, please PM me and I'll gladly help you find what you need.
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