Increasingly, all global citizens regardless of their nationality, region of origin, or economic status are now empowered by blockchain and peer-to-peer technologies to take part in building digital economies powered by decentralized networks called blockchain technology.
Due to its anonymity, trustlessness, and security, it allows transnational transactions to be conducted anonymously and securely online.
The level of financial intelligence from the traditional financial system is considered to be very low as most people, especially from poorer countries, practically stay away from the intricacies of understanding how this financial system works.
As a result, a greater number of people have become impoverished as most financial companies tend to complicate matters surrounding the field of play when it comes to money matters.
As a result, more and more people, especially those in the third world, are being left out of the banking system.
It is vital, however, for users to gain a basic understanding of credit scores from the financial perspective and to be able to translate them into the crypto arena for them to take part in the financial revolution taking place recently.
What is a credit score?
By implication, a credit score is a number that translates a user or consumer’s creditworthiness. The higher the score an individual has with their financial body, the better a borrower looks to potential lenders.
Alternatively, a credit score can also be defined as a score or number determined by a proprietary mathematical algorithm that helps lenders predict the individual propensity to pay back loans.
Usually, a credit score is based on some factors which include users’ credit history: by implication, this includes the number of open accounts, total levels of debt that is associated with the user or individual, and level of repayment history, including other factors.
How does a credit score work?
A credit score can significantly affect your financial life such that it can determine if an individual can be termed creditworthy to own properties or buy some essential equipment for their household use and so on.
It plays a fundamental role in facilitating a lender’s decision to offer the customer or user some credit. There is a scoring system that is applicable generally ranging from 300 to 800 (300-800) such that people with credit scores below 640 in this case are generally considered to be subprime borrowers (They are seen as people who would unlikely be able to repay their loans).
Lending institutions often charge interest on subprime mortgages at a rate higher than the normal mortgage in order to accommodate the associated risk.
However, a credit score of 700 or above is considered good and may result in a borrower receiving a lower interest rate, which results in their paying less interest over the scheduled period of the loan. Then there are those with scores greater than 800 that are considered excellent (Creditworthy).
Is credit score applicable to cryptocurrencies?
Cryptocurrencies work similarly to physical money or fiat from traditional finance systems, because they have value because people agree to use them as a means of exchange.
However, they’re different in the sense that they’re virtual or dependent on computer algorithms developed using blockchain technology. Cryptocurrencies can be used in almost all forms of financial transactions and instruments, for example, lending, staking, borrowing and so much more.
Although the traditional financial system is controlled by a central body, cryptocurrencies are developed and programmed to run without a human or a central authority for it to execute the transactions.
Is it possible to implement a crypto lending system?
This is a possibility in the crypto space which brought about the terminology Decentralized Finance (DeFi). Such smart contracts were developed to execute commands that would facilitate financial transactions in a decentralized way and give opportunities for global players all over the world to participate, leveraging their cryptocurrencies against access to funds borrowed for other purposes.
This has created more opportunities and opened the crypto world into what is actually possible in the traditional finance markets.
Does crypto lending affect your credit score?
One of the exciting possibilities in getting a crypto-backed loan is that most of the decentralized platforms would not usually carry out credit checks on borrowers or rely on their credit score to approve a loan since it is decentralized in nature and most times the borrowers are anonymous.
The requirement is basically their cryptos to be used as collateral in order to facilitate the loan approval. This is a more secure, faster, and cheaper way of borrowing than the traditional financial system which is associated with bureaucratic bottlenecks to validate a loan application.
Therefore, everyone is privileged to access lending opportunities as long as they have the required cryptocurrencies to back the loan application.
In conclusion, the financial world is transforming and cryptocurrencies are changing the dynamics thereby creating the required financial freedom the world is looking forward to in recent times.
