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It’s not news that everything around didn’t always used to be the way it is now. Believe it or not, at one point people didn’t work in front of computers all day. There was a time before email when people wrote thoughtful letters to their mom on Mother’s Day. There was even a period when we didn’t domesticate dogs for our leisure and/or protection — but that is really going back.

With this is mind, let us reconsider the credit score. Today it is sacrosanct — the gateway between all reputable financial institutions and almost every big, responsible account in our lives. Whether it’s a mortgage, a new credit card, a small loan to buy a car, and in some states, to get insurance — there’s the credit score staring us in the face, forcing us to reconcile with its power.

Of course it wasn’t always this way. But how did we get here and when? And what can the genealogy tell us about the future?

Credit scores didn’t become widely used by financial institutions until the early 1980s. Before then, lenders took a more “romantic” approach — i.e. they basically observed human behavior and intuited whether the would-be borrower was a good investment. Anyone who’s ever been wrong about anything (i.e. all of us), can guess that this method didn’t always work out for the best. Maybe someone fails to make eye contact because he’s hiding something, or maybe he’s just shy; Buddhists remind us that all judgements are fictions.

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Check Your Credit For FreeWhat happened next was the emergence of what is now called “big data.” The computing revolution combined with Reagan-era deregulation and consolidation within the financial sector; this double helix provided lenders with boatloads of historical data that modeled the likelihood of consumers paying off their loans. Credit bureaus sprung up to fill this new great need for reportage, and started providing credit scores to banks and credit unions quickly and inexpensively.

Insurers watched all this happening from a related perch and wanted to get in on the data action. They used the model of credit score to create a very similar standard called the insurance risk score, which was used to predict the number and size of claims each consumer would make on his/her insurer.

We often think of credit scores as “ours” but in reality they are tiers created by financial institutions for themselves to gauge the level of risk when lending to you. By the end of the 1980s, credit scores were popping up all over the place as a norming factor across many variables that included amount of debt, number of late payments, age of accounts and other metrics. The thinking is that a numerical, multi-polar representation of past financial behavior is a strong predictor of future financial behavior. And since these lenders are such cold-eyed realists we have to assume that since the use of credit scores is only increasing — it must be working, at least to a degree.

[Related Article: Credit Score Impact on Your Car Insurance Rates]

Added data points by way of historical knowledge have only sharpened the practice of affixing credit scores to humans. But this proliferation has not been without its critics and resistance, asserting that judging future behavior based on the past is confusing correlation for causation. Many understandably feel the current system unfairly punishes those already economically disadvantaged, especially those who suffered financial damages through no fault of their own (see: Hurricane Katrina). In other words, the poor pay more for insurance relative to their income than do those who earn much more annually.

In response, California, Hawaii and Massachusetts have each made it illegal to use a customer’s credit score as a factor when arriving at a car insurance rate. It does appear the tide is turning, however slowly, against the use of credit scores in the insurance sphere. Nevertheless, the carriers and credit bureaus will not go down without a fight, and they have the lobbyists lined up in Washington to prove it. Perhaps the entrance of data — via GPS devices and other gadgets that monitor us on the roads — as it pertains specifically to our driving behavior and aptitude will yield strong enough metrics that credit scores will no longer be needed when arriving at car insurance rates.

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This story is an Op/Ed contribution to Credit.com and does not represent the views of the company or its affiliates.

Image: Amy the Nurse, via Flickr

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