What is Credit Rating
Although credit scoring was originally intended to gauge a person's borrowing capacity, it is currently used in everything from financial activities, from signing a new cell phone contract to renting a car. a condo. It's now a way of knowing if customers are financially responsible (Sean LaPointe), all based on a three-digit number. Therefore, good credit is generally more lucrative than excellent work (Experian).
But despite being more widely accepted than ever, the method used to calculate creditworthiness and the information used to act have changed little.
What's wrong with credit rating?
The amazing thing about this model is that it only uses past loans to price future loans. This results in situations where someone with a well-paying job and living savings with no credit score has a worse rating than someone who spends all of their income paying off loans on previous loans. This fact has led to a recent rebellion of financially stable people who, despite having plenty of money, take out loans just to improve their creditworthiness (Emma Woodward).
We can do much better
This is clearly a worrying signal. Not only do we have barriers to entry for financially stable people to get credit, people are now generally encouraged to take on more debt. Of course, it shouldn't be like that. Fortunately, we can do something about it.
The new strategy can be a great win for many people, especially young people who are new to borrowing but already have a strong profile. However, we haven't seen any method that takes advantage of these benefits, and there's a point to that - privacy.
The privacy dilemma
This concern for confidentiality was the main obstacle. Moreover, despite the fact that there are modes that could extract credit scores from this knowledge, we are still living with rusty old credit scores. Yet there is hopeful light on the horizon.
Private calculations
Over the past 10 years, there has been a rapid increase in improved data processing tools for privacy protection. These are tools that allow running algorithms on non-public knowledge without ever risking revealing the information.
In our case, it could work like this:
You will ask your phone provider to give the details of your encrypted call to the credit bureau. You are then able to check the creditworthiness of the encrypted information without knowing who you called. But as a result, they get a greatly improved credit rating. A win-win situation for both events. And this can be achieved with any type of data and even with any type of analysis methods. More importantly, you can ensure that the private information you constantly submit remains personal.
Today, there are two main directions for these private calculations - software-based and hardware-based. The software strategy is based on cryptographic methods, including solutions close to multiparty computation (MPC) and fully homomorphic encryption (FHE), whose improvement is still very early. The hardware strategy consists of special chips called confidential computing units that have already been used in the real world to protect sensitive data during computing. This latest technology is currently the most promising candidate to build the required improved credit score model, which is absolutely timely.
What should our future be?
There is growing compelling evidence (Credit Scoring in the Era of Big Data) that the new era of credit scoring is not too far away and will hopefully see adjustments over the course of the next decade.
However, it is reasonable to assume that with personal computing technologies this will also change and we will see an increase in activity related to information sharing. With our consent, our encrypted information could likely be shared anonymously between companies to help them provide better insurance deals, mortgages, buy-it-now offers, pay-later offers, etc.
In the age of big data, the more data we get, the better providers we get. And privacy, the only major bump in the street, seems to have been smoothed out.
