I want you to know two things: First, while credit is so valuable when trying to get a loan, you need to know the rules. The following Wikipedia article will help. So learn as much as you can, starting with reading this explanation of how credit reporting got started in the first place. Second, I want you to know that you can learn to live without any credit at all, ever! Then you are not dependent upon your FICO Score. Keep this in mind while you read this historical sketch. For more information on living FICO-score free, contact me, peter@moneymastery.com.
The story begins…
We wouldn’t need credit reporting, were it not for Edwin (Source: Wikipedia)
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 store keeper 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 storeowners 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 a 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 CRAs (credit reporting agencies) 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 regional in nature, at best. That regionality is a characteristic [of credit reporting] that only recently has begun to disappear.
If a little data is good…..
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 a person’s 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 County were covering the Chicago and Midwest areas. [The Edwins of the world] 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 its approximate 4 million ledger-card files…..contained in 400 seven-drawer cabinets. [From this] 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 its 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 U.S. mail, or relying on a phone call, TRW’s electronic reporting propelled it to the top of the heap, making it 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 U.S. 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 in an unregulated industry gone hog-wild. 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 and violators were dealt with harshly, resulting in denial of access to any further reports, and occasionally lawsuits over confidential trade information rights. The CRAs refused to make consumer disclosures. You didn’t know what was in your file, nor could you correct any errors. The CRAs 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 became 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 procedures…the FTC was given charge to keep the CRA’s supervised, and occasionally report back to Congress on their progress. However the CRA’s and the banking industry make for a very powerful lobby, while many of the rules have been watered down from the FTC’s original recommendations under lobbyist’s pressure.
A brief history of credit cards…
1950- the Diners Club issued the first credit card in the United States, useful for New York restaurant bills only. Twenty-seven 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.
1993- Sears Consumer Financial Corporation changed its name to NOVUS Credit Services Inc. and they all became Morgan Stanley following a merger in 1997.
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!
BankAmerica 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 BA by purchasing up several smaller banks. Citibank is now being challenged by HSBC.
