The credit scoring system is nothing new. For years we’ve been told to watch how we spend, to spend only what we have, and to monitor our credit card usage. We know that debt—whether school loans, car loans, or medical debt—can be used against us.
With the current credit scoring system, this can mean problems when we want to borrow money or rent an apartment. So what if that system experienced an upheaval? What if blockchain can make that possible?
If you’re unfamiliar with blockchain, it’s the creation of Satoshi Nakamoto which is believed to be a pseudonym for a group of people, who are working together under a single name.
Blockchain allows digital information to be easily distributed without making it available to be hacked or copied. Like a digital ledger, new information can be added, but because of how it’s stored, old data cannot be easily altered or deleted.
Blockchain technology began with the creation of Bitcoin, a digital currency. Since then, it has evolved into something much more significant. Blockchain has essentially created a new foundation for improved internet infrastructure.
Is there potential for it to continue evolving until our current credit scoring system is obsolete? It’s a possibility.
You don’t necessarily need to know how Blockchain works to take advantage of it. If you’re curious, though, here are the basics.
If you’re at all familiar with computers and the data they host, you know there’s usually one centralized location that stores information. That information is susceptible to hacking, and what’s stored there can quickly become corrupt.
Blockchain changes the way this infrastructure of data works. Rather than one central location where data is housed, the data is duplicated and kept in multiple locations. Regularly updated, the information is no longer available for hackers to invade or corrupt.
Blockchain creates an indeed shared platform. Information is accessible to anyone at any time on the internet.
Like an outdated approach to editing documents in a group, our original understanding of the internet and documentation is limiting. Think of Google docs as an example. As people begin to gravitate toward shared platforms, we become more efficient with both our time and storage space.
Likewise, our understanding of how best to use and store data on the internet is evolving as well.
Blockchain allows for more sophisticated maintenance of information and records. There will be no mistaking whether or not you have the latest version or if some information has been misplaced.
While there are many benefits of using a blockchain style system, there are two highly important ones worth mentioning.
The first benefit is that there is no one single place where information is stored. This also means it has no single point of failure.
Something would have to happen to the millions of computers that have access to the information for it to be lost. It’s highly unlikely that would ever happen.
The second is that no single entity or person has control over inputting or maintaining the information. The information held within blockchain parameters cannot be altered or corrupted easily.
This is, in essence, a public platform, where information can be shared and accessed.
We don’t need to get too caught up in the ins and outs of the blockchain system. For now, let’s look at how this technology can change the way we approach credit scores.
Consider that the current (outdated) centralized system in this instance is the bank. The bank has all of your information. If you want to access any of it, you have to go through your bank to retrieve it.
This is the case whether you need the information for a mortgage, a new car, or educational loans.
Once that information is obtained, you then go ahead and pass it on to the party in question. This kind of system means sensitive data passes through many different hands. In this situation, there are multiple moments of vulnerability for the information that keeps your identity—and credit score—protected.
Another problem with this current method is that changes to your credit history are often slow to appear. Quite a bit of trickling down has to happen, to reflect any positive changes you’re making.
Positive changes might have taken place that should be reflected in your credit score. But this isn’t always captured quickly in the information that can be pulled by the bank.
These systems are maintained and passed along by humans. You need to worry about the security of the individual computer networks your information is traveling through. You also need to be concerned about the possibility of human error.
A blockchain system entirely changes how this information is communicated. Data breaches (such as the Equifax hack) can be a thing of the past if we move to Blockchain.
Good credit is one of our most valuable assets. We frequently need to prove our credit history by providing sensitive information. Social security numbers, driver license numbers, passport numbers, and other identifiers are passed back and forth during credit inquiries.
It’s worth repeating that, during the process, we are vulnerable to having information stolen. A traditional system need only have that central computer hacked to gain access or control of information.
Alternatively, a blockchain system requires a hacker gain control of over 50 percent of the network to be successful. It is doubtful to happen—and certainly not without someone noticing.
Using blockchain means credit checks no longer expose or endanger sensitive data. You will have faster, more current results to an inquiry. And at the same time, you won’t be putting your identity at risk of theft.
With blockchain, we can also seamlessly pass information back and forth outside of the existing structures in the United States. In the past, credit histories haven’t been easy to take abroad with you. Moving to a new country could result in needing to start over entirely, regarding establishing your credit.
Blockchain technology allows for a global credit platform. You’ll no longer be confined to a single country, and can take your credit history with you wherever you go. In today’s “global village” of a world, this kind of flexibility is extremely useful.
The changes blockchain brings with it can impact everyone. However, some pockets of the population will reap more significant benefits from the transition. Those groups of people are minorities, youth, and those who are underbanked.
In a rapidly changing economic environment, these groups need more help than they ever have before. In recent decades, the entire backdrop for our financial system has experienced upheaval.
The cost of real estate and education are growing much faster than pay rates. Young adults are finding themselves saddled with more financial debt and worry. They have also noticed they aren’t in control of their credit history.
Large credit bureaus, like Equifax, aren’t viewing the average person as their client. Instead, the company sees that person’s information as something to share with other banks and lenders. Far from a client, the person in question becomes a commodity to be used as the firm sees fit.
Moving toward a blockchain system for credit scores will allow people to take back some of the control. Not only can they see and maintain their credit information, but they can also disseminate it as they see fit.
In the post-Equifax environment, two things have become increasingly apparent. The first is that the bulk of our credit information shouldn’t be stored on credit bureau systems. The second is that social security numbers shouldn’t be used as a primary identification tool.
Before the Equifax hack, there was limited interest in moving toward a blockchain credit storing system. There was a strong inclination not to change something that had been working for so long.
The Equifax breach brought home the fact that this system isn’t working quite as well as it was thought to have been. There are, however, still some things that need to be addressed in the blockchain system—speed and expense are both issues. Even so, a future involving blockchain looks mighty bright.
It’s not likely that the traditional credit scoring system is going to fade out into nothing overnight. The big names in the industry are most likely going to be around for a while to come.
There’s still a lot of work to do with the blockchain platform before we can access all the advantages that come along with it.
It’s promising that this push toward a blockchain credit scoring system can allow for less identity theft. Individuals will have more control over their information and who has access to it.
With some adjustments and improvements, a blockchain system might revitalize our understanding of credit scoring and share entirely.
Keep your eye on the blockchain system and how it continues to evolve. You may be pleasantly surprised by the overhaul our credit scoring system could experience shortly.
John Blakely has had a passion for all things personal finance for over a decade. He is a firm believer in having big financial dreams and executing on a plan to realize them. He is an Education Ambassador for ScoreSense, where you can find more of his writings.