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The Evolution of the Credit Score

We don’t all understand how credit scores work. But we do all know just how important our credit score is. Besides the well-known ways a low score can impact you - like loan denials - in Canada, a low score can also affect you in ways you may not know. For example, your ability to get a job or your insurance premium rates.

So how did such a powerful number come to be? What’s the story behind these three little digits, that in large part, are responsible for our quality of life? It’s time for a brief history lesson.

The Wild West of Lending

Before the standardized credit score ever came to be, lending approval was largely in the hands of individual lenders and companies. It was a highly subjective process, one that used word of mouth and personal character traits as a way to determine loan-worthiness. That means you could walk into one financial institution and be turned away because your tie wasn’t knotted in the way a lender preferred - or, you could be accepted because of it.

This biased approach couldn’t even be called a system and it largely impacted those who had less social power than others, reinforcing hierarchies and leaving many people without any lending options. Getting approved for a loan was often based on a personal relationship between a lender and a borrower.

A Well-Intended Start to Scoring

In the mid-1800s, American companies attempted to create the first standardized scoring system for commercial borrowers in North America - unfortunately, it was based heavily on the misinformation found in those biased credit reports. Even though it was a start, and it did open up credit opportunities for many businesses, we still had a long way to go in making the process more objective and data based.

Regardless, the building blocks were in place for eventually creating a fairer system. The surveillance needed to create reporting files used in determining a business’ loan worthiness (or, as we call them, credit reports), information sharing across lending companies and financial institutions, and the beginnings of a numerical rating system. These pillars would prove to be instrumental in making the private loan sector a possibility.

A New Dawn of Credit Scores

Although a loose system was in place for American commercial borrowers before the 20th century, personal lending was still a hodge-podge practice until the 1950s, when Bill Fair, an engineer, and Earl Isaac, a mathematician, arrived on the scene. These two got together and created a relatively reliable and unbiased statistical model that could predict the ability of individuals to pay back a loan. They used correlations between behaviors that suggested someone would be a good credit risk and someone who might just be too risky. Called the Fair Isaac and Company - later known as FICO - the credit reporting agencies jumped on the chance to bring order in the still chaotic world of credit reporting with this score-based model.

Fast-forward to 1989, and the American credit score model reached Canada through TransUnion Canada and Equifax Canada. Also known as the Beacon Score under Equifax, the numerical system may have made it possible for the everyday Canadian to have access to credit - but it hasn’t done much to clarify how, exactly, that score is determined.

That didn’t stop many businesses from using it to safeguard their lending practices - even far beyond just banks and financial institutions. And the proliferation of using credit scores to determine everything from apartment renting to cell phone purchases and beyond has become a controversial practice to many Canadians.

A Look at Canadian Credit Scores

One thing we do know about Canadian credit scoring systems is that the scores are largely generated from how much debt-to-income the average Canadian carries. If you carry what is deemed as a statistically relevant level of debt, it doesn’t matter how much you save from each paycheque or that you pay your rent on time each month. It’s also less likely for companies to report when you make payments, rather, only sending in notices to the credit bureaus when you make a late payment or miss one. This naturally removes a big part of the puzzle when determining someone’s ability to pay back a loan.

On top of that, Canadian credit scores can change based on what type of business is checking your credit. For example, if you are applying for a car loan, that score is calculated differently - and therefore may look different - than if you were applying for a home loan. There’s also a different impact on your score between soft pulls and hard pulls. This makes it difficult to keep track of what your score is at any given point in time.

A slightly improved system may be on the way to us, though, via the UltraFICO scorecurrently making the rounds through the States. This system will look at how cash flows in and out of your account, potentially giving your score a boost. It could be years before the system is fully adopted by credit reporting companies and makes its way to Canada.

When Low Credit Scores Don’t Matter

Despite the increasing number of businesses using credit scores to make selling decisions, there are lending companies out there who believe that a low credit score doesn’t automatically mean the borrower won’t pay back the loan. At 310-LOAN, we don’t use your credit score or even run a credit check on you – which also saves you a few points on your score. We can help you get the funds you need fast, through a transparent process and a high-quality customer service experience. The application is quick and can be completed online, and cash can be directly deposited right into your account in as little as 30 minutes upon approval.

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