Across the globe, people are struggling with debt and the ability to pay their mortgages. Nowhere is this more apparent than in the USA where 37% of households are liquid poor. However, the good news is that technology is evolving and leveling the playing field. Today, true to its nature as a progressively disruptive technology, blockchain is poised to upend another long-standing financial institution: the FICO credit score.
The State of American Credit
While calculating credit scores are arguably simple, it’s the concept of credit itself that can get very complicated. Credit scores above 800 are considered excellent, and by the end of 2019, the credit score of the average U.S. citizen reached 703. This means that people have generally been more responsible in terms of paying their bills and debts on time. But while this is happening, average debt balances have actually risen for most types of loans —with two-thirds of credit card debtors today owing as much as they have owed in the past ten years.
In short, the way most Americans have been up-to-date on debt payments is by juggling different avenues of credit, the maintenance of which directly raises credit scores —but ironically also tends to keep people in debt. It’s a system that can be unforgiving, not just to people in deep debt, but also to those with very little to no history of building credit —a segment of the population that increases with every passing year. In today’s current climate, Petal Card reports that 10 million American adults under 25 years old have zero credit history. And as more young people reach the age of credit eligibility, millions more with zero credit will enter the cycle of debt and become unable to build a good credit score.
Disruptive Fintech, New Financial Data, and Other Opportunities
Blockchain and other disruptive alternative fintech models could soon allow people to circumvent this cycle. For instance, Lukas Hofer previously discussed how crypto credit cards have been pushing the use of cryptocurrency in physical stores and even adopting existing card payment infrastructure in the process. With cryptocurrency use factoring into a credit rating, debtors can have an alternative and potentially profitable way of tipping the scales of credit in their favor. Furthermore, this generates more legitimate financial data, records that can be used to pinpoint thousands of additional data points previously ignored by traditional credit score parameters. As new financial data sets enter the picture, new opportunities for calculating creditworthiness arise —yet another opportunity for blockchain.
Holistic and Social Credit Parameters
“Blockchain technology can provide assistance to reputation-based credit scores in a variety of ways,” explains crypto investor and analyst Igor Davidov, who imagines a more holistic approach to how financial institutions can calculate credit scores. “From being on time to meetings to donating to charity to helping a stranger change a tire, all these experiences could be recorded and verified.” Rather than just relying on the current data avenues and models for determining credit rating, new technologies could allow other significant social factors to enter the picture.
For instance, a company called Colendi harvests smartphone information on people’s purchases, social media activity, and personal loans to calculate their version of the credit score. Although currently in its developmental stages, the platform allows people to build financial trust through a series of small transactions streamlined through Colendi’s blockchain-based platform. It’s resulted in a working ecosystem in which new, holistic, and arguably more accurate parameters for calculating credit ratings are being developed, potentially challenging FICO and other long-standing credit standards.
Whether through cryptocurrency or other blockchain-based platforms for transactional data, blockchain will have a huge part in shaping the way we calculate credit scores in the future.