When it comes to evaluating the creditworthiness of borrowers, credit score is the gauge for it. Like traditional finance, decentralized finance (DeFi) also has lending activities developing robustly in recent years. In response, there are also some scoring systems for the credit risk emerging in DeFi, which you can find out more about in our previous article (here).
However, the current Web3 credit score systems are limited to specific lending platforms and thus, are not used as the general model for the whole DeFi. Therefore, Centic developed a trustable and comprehensive credit score model — “FICO Crypto Credit Score”, which holds many of the borrowers’ unique insights.
What is FICO Crypto Credit Score?
Similar to the Credit Score in Traditional Finance, FICO Crypto Credit Score is the scoring system in DeFi that evaluates the credit risk as well as the ability to pay the Crypto loan of borrowers (wallet addresses).
This scoring model is based on FICO credit score, a reputable scoring system used by most lenders (including banks, institutions and credit organizations).
FICO Credit Score
FICO scores are three-digit numbers ranging from 300 to 850, with 850 being the best score. They are calculated based on information included in consumer credit reports. There are five factors that go into the calculation:
- Payment history: Payment history accounts for 35% of your FICO credit scores. On-time payments can be helpful to your score, while late or missed payments can result in lost credit score points.
- Credit utilization: Credit utilization refers to the percentage of available credit that’s in use at any given time. This factor accounts for 30% of FICO score calculations.
- Credit age: Credit age measures the average length of time for which someone has been using credit. The older someone’s credit age is, the better. This factor accounts for 15% of FICO credit score calculations.
- Credit mix: FICO also considers the types of credit someone uses (i.e., installment loans versus revolving credit). Credit mix makes up 10% of FICO credit score calculations.
- Credit inquiries: Credit inquiries account for 10% of your FICO credit score. A new inquiry is registered on your credit report following a hard credit check. Checking your own credit reports doesn’t trigger a hard credit pull or affect your credit score.
Why does Crypto Credit Score follow FICO Scorecard model?
There are many credit score systems in Decentralized Finance but are still limited to several lending platforms. To be accepted in the whole Web3 space, the credit score model must assure the trustworthy. Therefore, with FICO scorecard model as the basement, Crypto Credit Score designed by Centic aims to reflect precisely the financial performance and credit risk of wallet addresses.
Traditional finance and decentralized finance are different in some aspects, hence, FICO Crypto Credit Score is customized to fit the peculiarity of the blockchain world.
This is just one of the model scores on Centic. Organizations can flexibly customize their model to use for the specific system.
How FICO Crypto Credit Score is used in the market?
As Crypto Credit Score both shows the financial performance and credit risk in DeFi, it can provide many valuable insights and have useful applications.
For individual users, the Crypto Credit Score empowers you to demonstrate your creditworthiness and your active participation in the DeFi ecosystem, enabling you to access crypto loans today and potentially traditional loans on TraFi in the future.
For Web3 developers and businesses, our Credit Score model seamlessly facilitates the integration of these scores through a marketplace, allowing you to apply them to various other applications with ease.
How FICO Credit Score is calculated?
Following the FICO score model, CENTIC credit score varies from 300 to 850:
To make it clearer how FICO Credit Score is calculated, let’s find out more about the 7 factors contributing to the score:
- Total asset: The total asset represents the financial strength of accounts.
- DApp interactions: This parameter reflects the trustworthiness of the wallets. It evaluates the transacting behavior, type and reputation of Dapps they interact with.
- Transactions with other wallets: To evaluate wallet credit accurately, we examine its interactions with other wallets. Higher wallet credit results from numerous transactions with trustworthy wallets, while transactions with wallets holding poor credit lower the wallet’s overall credit score.
- Liquidation history: This parameter reflects the wallet’s credit risk based on assessing the age of the account along with the number of liquidations and liquidated amount.
- Loan ratios: Loan ratios (debt ratios) represent the debt position of an account.
- Investment-to-total-asset ratio: This ratio represents the activeness of the account in the crypto business. It indicates how much percentage of the total asset that the account puts into financing activities.
- Trustworthiness of possessing assets: The credit of a wallet can be seen by the value and trustworthiness of the digital assets it holds.
Conclusion
FICO Crypto Credit Score provides a standardized and trustworthy method for evaluating credit risk and financial performance in DeFi, benefiting both individual users and Web3 developers, and promoting broader acceptance within the blockchain ecosystem.
You can easily check and manage your Crypto Credit Score by connecting your wallet to Centic Portfolio. To explore the score as well as create your own models, let’s start off with our Scores Marketplace.
Centic is a data analytic platform that provides the scores of all entities on Web3 Space and integrates on-chain data in blockchain space and off-chain data in reality.
By providing a comprehensive evaluation system, we assist users in confidently making the right investment decision both in the traditional and digital world.
