What is a Credit Score and How Does it Help Prevent Fraud?

The credit score is used by almost all financial organizations. It helps to check a user’s creditworthiness. The credit score is either calculated by the government or by third parties, depending upon credit reports provided by credit bureaus (banks, Insurance providers etc).

This raises some questions. Let’s go through them one by one.

Did you check yours?

Why do financial institutions use credit scores?

Financial institutions provide financial services. To provide financial services they need to do the risk assessment. The credit score helps with this. The purpose of credit scoring is to provide a reliable, inexpensive and ready assessment for an individual’s credit-worthiness.

People have different behavioral dynamics which can change depending upon the product and the service. For example, a person can be in a bad financial situation. Temptation strikes when you’re paying only 5$ a month for insurance and if you file a claim in the first month, you will get 1000$ as your claim money. Doesn’t sound like a bad deal, right?

Such practices affect the insurance industry so badly that it loses $40 Billion every year in false and fraudulent practices attempted by users. This is just the insurance industry. If you take the losses in each financial sector this number will be a lot higher.

A credit score shows the potential risk of a user. For example, is he going to pay loans, premium, interest etc. The use of credit or identity scoring prior to authorizing access or granting credit is an implementation of a trusted system. We can not expect the credit score to be tamper-proof, after all, it’s very difficult to understand humans, isn’t it?

How are credit scores determined?

A lot of factors contribute to the credit score of a user. If you have a bank account or if you have ever been involved with banks or insurance, it is most likely that your credit score has already been calculated.

According to Time, the FICO score, which is considered as a credit score in the USA, uses 35% payment history, 30% amount owed, 15% length of history, 10% new credit, 10% types of credit used to decide the score.

This means every important transaction (loan, premium, interest) you make in your bank and with insurance agencies, is closely watched by banks. They usually give all this credit information to third parties to calculate the credit score(some give the information to the central bank of their country to calculate the score).

Every country has a different credit score system and a different structure to calculate the credit score. E.g. in Germany SCHUFA is a private company and the main credit agency, while in Italy there is no private credit agency. Italy uses a central information system as a central credit register which is maintained by the Bank of Italy.

How do credit scores help prevent fraud?

Credit scores help in many ways to prevent fraud. If a user has a really low credit score, the probability of getting a loan or insurance policy is too low. The low score shows that the user must have done something in his past to lower his score. This can be something like not repaying loans on time, not paying premiums on time, attempting malicious activity etc.

It helps companies do a risk analysis of every new user that they introduce to their portfolio based on existing data about the user’s behavior.

What is Tezscore?

At Tezsure we combine existing credit scores with extra data points to create a reputation system for our insurance platform called “Tezscore”. If you have a good Tezscore and you file a claim, it is more likely the claim will get approved automatically by our claimbot. But if you have a low Tezscore, extra measures will be taken to validate a claim.

One way to increase your Tezscore is with our endorsement feature. A friend or family member can vouch for you and show that you are a trusted user. This creates a positive incentive for the endorsee and requires the endorser to perform a personal due diligence. Through endorsements, the Tezsure platform becomes more risk aware, encouraging honest behavior.

Stay tuned to hear more about the latest exciting developments in the Tezsure ecosystem. Subscribe to us, follow us on social media channels and show your support to a breakthrough in the insurance industry.

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CPO & Cofounder @ Tezsure & Director @ Tezos India Foundation

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Malviyaop

Malviyaop

CPO & Cofounder @ Tezsure & Director @ Tezos India Foundation

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