The credit score system is, on its face, an essential mechanism to ensure fair access to lending. By using an objective credit score rating, lenders can determine how much of a risk individuals and businesses are for any loan, and accordingly require higher interest rates, additional collateral, or altogether decline to issue a loan. This in turn keeps the financial system accountable for the risk it takes on so that credit remains widely available for lower-risk debtors.
However, the credit score system is deeply broken due to a lack of transparency and objectivity. Numerous studies have found evidence of subjective bias against racial minorities, including the assignment of lower credit scores to minority-owned small businesses1 and the use of credit scores to deny, rather than support, loans to minority individuals2. The system is also prone to identity fraud, after which it can be nearly impossible for consumers to repair their credit rating3.
For individuals with bad credit, whatever the underlying cause, the consequences are severe. Entrepreneurs can find themselves unable to start or scale successful small businesses, while individuals may lose the ability to build wealth through means such as homeownership4. In more extreme situations, consumers with poor credit may lack the means to cover essential costs of living and be forced to turn to predatory payday lenders.
Thankfully, Joos’ peer-to-peer lending environment offers a fundamentally redesigned credit score system.
In Joos, credit scores are recorded and tracked on the blockchain, just like financial loan transactions. This has two important ramifications.
First, credit scores are fully transparent and can be queried from the blockchain by any user – including the individual to whom a credit score belongs. Furthermore, checking a user’s credit score is not punitive to that score, as checking a credit score in the traditional financial system can be5.
Second, credit scores in Joos are fully objective and capture the full range of transactions made on the platform. This is a minor, but critical difference from traditional credit scores. While traditional credit scores are meant to be fully objective, they fail to account for most on-time payments and only register complaints when a payment is missed or late. That leads to a system in which consumers are penalized for delinquent financial actions, but are not rewarded for positive financial interactions6. In Joos, since all transactions are recorded to the blockchain, it is possible to incorporate both positive and negative payment interactions into the credit score and for potential lenders to see a debtor’s past transaction history.
Together, these two characteristics – transparency and objectivity – offer a solution to the deeply flawed credit scores used by the traditional financial lending system. Next, we’ll take a look at three ways in which Joos’ credit rating system can benefit users on the platform.
An important flaw in the traditional credit score system is that positive financial transactions, such as on-time payments, are often not reflected by an individuals’ credit score6. In Joos, since payments are recorded to the blockchain, this is not the case. That means that individuals with poor credit have the opportunity to build their credit score on Joos by taking out small loans and making series of on-time payments.
This is where the diversity of lenders on Joos can play an important role. Small lenders with more risk tolerance may be more willing to work with individuals with poor credit scores in exchange for higher interest rates or more valuable collaterals to securitize loans. As individuals’ credit scores improve by repaying these lenders, they can take out larger loans or loans with lower interest rates from more risk-averse lenders.
One of the major problems with the lack of transparency in the traditional credit rating system is that it is nearly impossible for consumers to see which transactions or missed payments caused a credit score to drop. Ultimately, this means that there is no way for consumers to explain specific missed payments and any extenuating circumstances to potential lenders.
On Joos, because it is possible to see the full history of transactions that comprise a credit score, it is possible for lenders and debtors to have real conversations about specific delinquent payments. In many cases, debtors may be able to use their transaction history on the platform to provide evidence for their claimed circumstances at the time of the missed payment, and to demonstrate to potential lenders that missed payments were an anomaly rather than the norm for them. Ultimately, this may lead to lenders being more willing to work with debtors with marginal credit scores, which increases the availability of credit for everyone.
Joos’ credit score system does not inherently eliminate bias, in the same way that the traditional credit score system is not inherently designed to promulgate bias. However, because Joos is an anonymous platform and there is ample opportunity to build credit scores, Joos’ credit score system offers numerous paths for overcoming racial and other biases that are rampant in the traditional credit scoring system. Furthermore, the diversity of lenders on Joos virtually ensures that debtors, regardless of their race, economic status, or other non-financial factors, will be able to find a lender willing to work with them.
Joos is redesigning the consumer credit score system to be more transparent and fully objective. Thanks to Joos’ credit scoring system, debtors on the platform will be enabled to build their credit scores over time as well as to work with lenders to explain extenuating circumstances around past anomalies in their credit history. Importantly, these improvements to the credit score system promise to address many of the flaws in the traditional credit score system, including rampant bias and a lack of transparency.
1.Henderson L, Herring C, Horton HD, Thomas M. 2015. Credit Where Credit is Due?: Race, Gender, and Discrimination in the Credit Scores of Business Startups. The Review of Black Political Economy 42(4):459-479.
2.Brown J. 2019. Unscoreable: How the Credit Reporting Agencies Exclude Latinos, Younger Consumers, Low-Income Consumers, and Immigrants. Unidos US.
3.Blascak N, Cheney JS, Hunt RM, Mikhed V, Ritter D, Vogan M. 2019. Financial Consequences of Identity Theft: Evidence from Consumer Credit Bureau Records. FRB of Philadelphia Working Paper No. 19-2.
4.Korver-Glenn E. 2018. Compounding Inequalities: How Racial Stereotypes and Discrimination Accumulate across the Stages of Housing Exchange. American Sociological Review 83(4):627-656.
5.Stapleton L. 2019. Does Checking Your Credit Score Hurt Your Credit Score? Credit Sesame. https://www.creditsesame.com/blog/credit-score/does-checking-your-credit-hurt-your-credit-score/.
6.Lake R. 2019. How to Use Apartment Rent to Build Credit. Credit Sesame. https://www.creditsesame.com/blog/credit-score/guide-renting-first-apartment-using-rent-to-build-credit/.
