Can Blockchain Change How We Compute Credit Scores?

[Pegasus]

From supply chain management to elections to finance, blockchain technology is improving business processes across many industries. But what about the credit industry? Could blockchain improve processes there as well?

Blockchain has been making people “in the know” reconsider the way they handle finances. At its most basic level, blockchain is a triple-entry accounting ledger that is part of a network. Each blockchain contains a copy of that ledger and every new record will be added to that ledger and each new record will be linked to the previous one. Each group of entries forms a block and since new records are linked to the record before that, it forms a chain. Hence, the name blockchain.

Credit scores, on the other hand, are something that banks and other financial institutions judge your creditworthiness against. Meaning, if you have bad credit, banks or any other financial institution will not approve your loan, or you will incur higher interest rates on your loan compared to someone with a good credit rating.

Credit scoring bureaus often use your social security as your identity. If your identity is stolen and your credit ruined, it will be a nightmare to fix.

So how are these two connected, and more importantly, can blockchain actually affect how we compute credit scores?

In the world of credit scores, there are three big players: Equifax, Experian, and TransUnion. These are the three main credit scoring bureaus used by many banks.

In 2017, one of the “big three,” Equifax, was breached and the personal data of millions of people – including their social security numbers and other information – was compromised.

Since credit scoring bureaus hold all their information centrally, breaches like this put millions of people’s information at risk. This is one of the major downfalls of the current credit scoring system.

Aside from that, credit scores are based on reputation and how you handled your previous debt. And since having a bad credit score can affect your access to formal financial institutions, even your employment and the chances of renting a place to live in, people across the globe who are underbanked or unbanked are currently on the losing end.

People also have very little insight into what is happening with their credit data. There is also very little that anyone can do to protect themselves from fraud or mistakes.

The data collected by these bureaus are accessed by people usually only when they are applying for loans such as mortgages. And the credit reports they provide consumers are different from the credit reports they provide banks. The banks get more detailed reports thereby creating a power imbalance.

What blockchain can offer is a decentralized system. This means that there is better security over your sensitive data. This also means that it would be harder for people to provide false information and hide any financial indiscretions.

This decentralized system will remove many of the barriers consumers have to accessing and controlling their credit reports. Consumers can give their entire credit history and not just the bits and pieces the credit bureaus provide.

Blockchain can also empower the people who have no access to formal financial institutions and improve their lives and finances.

So can blockchain affect how we compute our credit scores? The answer is a resounding yes. Blockchain has the potential to provide fairer, more transparent, and more complete credit reports, therefore, affecting how credit scores are computed and viewed.

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