Credit Scoring Methods — A New Hope “Colendi”
The word “credit” stems from Middle French, fifteenth century. It means basically “trust”. Humankind has always been trying to find ways to evaluate abstract concepts such as intelligence, credibility and popularity. So, what is the true methodology to evaluate these subjective aspects objectively?
Evaluation of Subjective Concepts
In the beginning of twentieth century, Alfred Binet and his colleague Theodore Simon invented a test to measure intelligence and detect students who would outperform or possibly need an extra assistance in school. Soon after this test had been adapted to US by Stanford University psychologist Lewis Terman, it became the standard IQ test in the country. In the following years, many countries started adopting the test and they still use “The Stanford-Binet intelligence test” to assess intelligence of individuals.
There appears to be similar challenges to evaluating the financial risks. Credit scoring is one of the ways to evaluate a potential borrower’s trustworthiness in paying his/her debts. The most common credit scoring tool is the “FICO” score. It is a statistical number derived from the combination of several factors such as the borrower’s previous payment history, his/her actual debts, the length of payment history, recent credits and the type of credits.
An individual’s FICO score generally has a numerical range of 300 to 850, a score more than 740 representing a satisfactory credit history while a person having a score lower than 650 may end up getting a credit with higher rates if not get rejected directly. Although being commonly used, FICO can only take into account one’s reliability based on solely on his financial data, and has a very shallow approach to expand to the general population.
Credit Rating and the Big Three
For companies, there are three big credit rating agencies which are generally referred to as “the Big Three”: Standard & Poor’s, Moody’s, and Fitch Group. 95 percent of global market share is owned by the Big Three collectively. They can rate credibility of national and international corporations as well as counties. All three have a similar rating system and what they really do is to report on a business or country and rate them as “investment grade” or “speculative grade”.
Credit Scoring in Developed Countries
Just like credit reporting systems, credit scoring systems vary from country to country. In some countries, like France and Portugal only negative information are reported. On the other hand, in USA, UK and Canada both positive and negative information are reported.
In UK, it is harder for non-voters(non-residents) to successfully get a credit. In Germany, there is a chance to get a negative credit report deleted if it is paid within six weeks.
All these counties have huge databases for credit reports which makes it easier for creditors to assess a potential borrowers’ trustworthiness. Likewise, it is easier for investors to get the credit they need given that their credit history is clean. However, for the majority of people in developing countries, there is a lack of reliable data on credit history.
Colendi’s Blockchain Technology in Finance
Colendi, a blockchain based decentralized microcredit and credit scoring platform, offers its users financial passports with credit scores. The score is calculated with the general smartphone, social media and transactions are processed by a machine learning algorithm on a decentralized blockchain platform where everyone’s privacy is maintained. Moreover, the users are given the authority to control their credit scores share it with the merchants of their choice.
The Importance of New Credit System’s on developing countries.
All these new ways of credit scoring make it possible for investors run their businesses and create opportunities for people all across the world. Providing a credit score will allow everyone to take part in the modern financial system. As these systems become more and more common in developing countries and investors gain access to credits with reasonable interest rates, job opportunities and general prosperity will increase. Just like technological advancements in agriculture and health, advancements in credit systems will have a huge impact on the global society.
References
https://www.lowcards.com/psychometric-test-brings-credit-scores-undeveloped-countries-21489
http://irssh.com/yahoo_site_admin/assets/docs/11_IRSSH-224-V3N1.131230845.pdf
https://www.colendi.com/whitepaper
https://www.slideshare.net/eleonoramartignoni/credit-rating-agencies-what-are-they
https://www.verywellmind.com/history-of-intelligence-testing-2795581
