Chinese authorities recently released a draft of the 13th Five-Year Plan containing a controversial social credit system that would harness vast troves of data collected from individuals to calculate a credit score that could influence everything from securing loans to school admissions. While the idea may seem dystopian to the West, the Communist Party is already piloting the program in local governments and plans a nationwide rollout by 2020.

Here we'll take a closer look at this credit system and its potential implications—both in China and around the world. (For related reading, see: The 4 Most Important Effects of Rising Interest Rates.)

How the Credit System Works

The Chinese government collects a significant amount of information on its citizens given its tight controls over the internet, banking sector, and local governments. Through these channels, the government has access to data ranging from income tax payments and credit card bills to academic honesty and online interactions. The government believes that these data points could be helpful in assessing an individual’s social standing and credit quality.

The social credit system aims to generate a credit score using these traditional, social, and online inputs. With such a comprehensive rating in place, the government could incentivize citizens with access to luxury hotels, travel rights, scholarships, and other benefits, while penalizing individuals by increasing insurance premiums, reducing loan amounts, or restricting access to certain services without directly intervening in each individual case.

Critics of this system argue that it could be used to further limit free speech and penalize those critical of the government, while those that support it argue that it will automate these kinds of evaluations to avoid singling out individuals and instead encourage good behavior across all citizens. The truth may lie somewhere in the middle, given China’s historical anti-privacy laws and actions against dissidents. (For related reading, see: Why Is China Stockpiling Millions of Barrels of Oil?)

Potential Implications

China’s government may be overtly implementing a social credit system, but the U.S. has laws designed to prevent such discrimination. The Fair Credit Reporting Act of 1970 (FCRA) limited the information that creditors can access and established rules for the permissible use of consumer reports. In addition, the Equal Credit Opportunity Act of 1974 made it illegal for creditors to discriminate based on factors like race, religion, marital status, or age.

Despite these laws, network advertisers, data brokers, and other companies have started collecting vast troves of information about individuals. This data is used to create consumer evaluation, marketing, and buying power scores that are designed to evade the FCRA and other consumer protection laws. They may not be used to explicitly approve individuals for credit offers, but they can be used to avoid advertising to undesirable demographics.

Citizens of the U.S. may not have to worry about a nanny state watching their every move, but they may still have to worry about private corporations aggregating data that’s used to inform decisions made by financial institutions. These decisions may not relate directly to approvals for credit, but they may influence the offers that are made available and ultimately determine whether someone is likely to access credit. (For related reading, see: The 5 Biggest Factors That Affect Your Credit.)

The Bottom Line

The proposed social credit system in China would harness significant sources of data collected from individuals to calculate a credit score of sorts. While this may seem intrusive to U.S. citizens, private companies already engage in some of these same practices in a more discreet fashion, which means that the implications of such a move could already exist. The U.S. government has passed several laws designed to prevent the use of irrelevant information when making financial decisions, but these laws have been cleverly circumvented in some cases by credit agencies, data brokers, and other parties. While it is unlikely this kind of socially-derived score is in our near future, it is still important for consumers to be aware of how data about themselves is utilized. (For related reading, see: Fundamentals of How China Makes Its Money.)

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