Forecasts show that blockchain will revolutionize various processes. Its features and innovative functionality are gradually changing pre-existing systems — and credit scores aren’t any different.
According to FICO’s ratings, the average American’s credit score is 703, which is ‘good.’ Credit score calculations rely on several variables concerning your credit history. They include a number of open accounts, repayment history, the total level of debt, and other factors. The higher the score, the better a borrower looks to potential lenders.
Citizens need credit scores for more than basic loans, credit cards, and mortgage applications. Landlords and apartment complexes heavily rely on them. Meanwhile, insurance products like renter’s insurance and automobile policies may even require a credit check. In fact, some employers might even seek a credit report before hiring a candidate. However, despite how useful crucial credit cards are for day-to-day transactions, credit card ownership actually declined amongst consumers aged 18-25 after the 2008 financial crisis, according to Petal Card. Not to mention, the average credit score for consumers below the age of 35 is 665. That falls well below the national average.
Following the Equifax data breach settlement that reminded consumers about how thousands of consumers’ private information was compromised, it comes as no surprise that younger generations avoid staying away from credit. Financial institutions and credit scoring bureaus need to look to blockchain as a possible solution given how crucial it is. It will potentially increase the number of credit card users. As well as guarantee more secure and easily validated transactions.
How can blockchain help with credit scoring?
“Blockchain technology can provide assistance to reputation-based credit scores in a variety of ways,” explains crypto investor and analyst Igor Davidov in a Medium feature. He imagines a more holistic approach to how financial institutions can calculate credit scores. This is because blockchain can help record and verify other significant social factors that may enter the picture. As opposed to just relying on the current data avenues and models for determining credit ratings. For instance, the blockchain can record actions such as donating to charity, helping a stranger change a tire, or even being on time to meetings.
Not to mention, blockchain’s entire structure emphasizes security — a must to gain consumer trust. This immutable ledger has the capability of providing much better protection for vital information. In addition, credit scoring became an easily solvable issue for such systems.
In fact, blockchain in credit scoring already started its implementation — albeit in small ways. HSBC was able to execute a live blockchain letter of a credit transaction and is being examined as the mode of issuing LC moving forward as businesses and the governments recognize the safety and swiftness in performing tasks using blockchain technology. On the other hand, companies like Bloom issue credit that’s fully operated on the blockchain, where consumers create and build a blockchain-based identity profile to improve consumer data security.
While we may be a long way off worldwide adoption, blockchain-based credit scoring is slowly happening. Many factors are already tipping the scales towards its use, and with hacks so prevalent nowadays, who would argue otherwise?