Canadian Finance Blog

How Credit Cards May Be Obsolete in 5 Years

Posted: 23 Sep 2011 01:00 PM PDT

One technology that could affect how many financial transactions are done, is the “digital wallet”. Some experts believe that monetary transactions will move completely away from paper currency or credit card payments in the next 5 years. They think that mobile phones with NFC (near-field communications) will completely take their place due to their ease of use. These phones will allow money to change hands by simply swiping our phones next to an NFC receiver. NFC chips allow for the exchange of money (or information) wirelessly, when 2 these devices are brought near each other. This new system of payment may change many aspects of finance, because it may not be centered around credit.

So, in what ways will this change how our credit history is created, how fraud is done, and how our credit scores are calculated?

Changes to The Credit System

How technology will change our financial system is difficult to answer at the moment. All of the major credit card companies are investing heavily into mobile transactions, but new players like Google or Paypal are big names that may treat these payments differently than traditional credit cards. They may decide to deduct fees for every transaction (like paypal currently does) or use a monthly fee, rather than setting up a credit system. These systems will also be open to EVERYONE, without an application. Since no credit is being used, people with bad or no credit will be able to use them.

One important thing that these mobile payments will change, is how our credit scores are calculated. A mobile payment system may operate differently than traditional credit cards. Credit scoring companies like FICO will have to change how they calculate credit scores. Responsible use of a credit card requires a different set of skills than a debit system. The ability to spend beyond what is in our bank accounts, makes them difficult to handle for certain people. How people deal with credit can provide proof of how responsible they are with money. If most consumers switch to a system that deducts money from an account or takes fees from each transactions, the credit scoring system will have to change. A credit score will have to be created from different metrics like rent, mobile phone contracts, and utilities. Currently, “alternative credit scoring” companies like PBRC use this data, but FICO hasn’t yet incorporated it into their algorithm.

New Opportunities for Fraud

Unfortunately, with any new type of technology, there will be the ability of certain people to exploit it. With Near Field Communications chips, fraudsters may be able to steal money by interacting with these NFC chips without a person’s knowledge. Hackers have been dominating the news lately and may see a “digital wallet” as a new target. Security holes are a huge problem for these new systems and must be ironed out before these systems go live.

In Europe, these mobile payment systems are being tested right now. They are starting out by limiting all transactions to £15 or less. This will allow these systems to be used only on low dollar items. This gives them the opportunity to fix most of the bugs before it goes into wider use.

Already Being Used Overseas

A different kind of mobile payment system is already used in developing areas like China and Africa. These mobile systems are used as an alternative to credit cards in these countries. Payments from a mobile phone allow small transactions to take place using a monthly bill. They allow a convenient way to transfer money, that is very similar to how a credit card works. Some experts believe that these type of transactions will “reach more than $600B globally by 2013″.

Credit scoring companies will forced to adapt when consumers use completely new ways to exchange money. Our credit system, bank accounts, and how we transfer money from one place will change as new technologies come online. It is important to stay on top of what metrics these credit scoring companies use, so we can keep our financial histories in good shape.

Author Bio: Ross runs the site GreatCreditScore.org which focuses on personal finance, credit, and staying out of debt. He also plans to document his experiences with the stock and bond markets.

How Credit Cards May Be Obsolete in 5 Years originally appeared on Canadian Finance Blog on September 23, 2011.

Friday Links

Posted: 23 Sep 2011 02:00 AM PDT

Wouldn’t you love a perfect credit score? Or even a better one? MoneyNing shared the 5 Rules n Achieving a Perfect Credit Score. You can bet I took notes!
Nowadays debt seems to be all around us. Thankfully this week Young and Thrifty wrote a helpful post that tells you How to Avoid Bankruptcy as a Couple.
One of the first things you hear about kids is that they will cost you a fortune! But Couple Money asks the question, Are Kids Really That Expensive? You might be surprised by the answer.
This week Canadian Capitalist shared a great article that discusses Building a Diversified Portfolio out of Claymore Exchange-Traded Funds.
There’s the saying that you can make money doing just anything. Financial Highway proves that with its 4 Creative Business Ideas. Be warned…these are pretty creative!
This week The Dividend Ninja asked the question we’ve all had at the back of our minds (or at least I have): What Happened to Income Trusts?
Our mortgages are the highest loans we’ll take out and thus the longest thing we have to pay off. How to Save Money wrote a great little advice post that serves as Your Guide to Getting the Best Mortgage Rate.
It’s one thing to want to change a financial habit and quite another to make that change stick. This week Frugal for Life shared 7 Steps to Forming Financial Habits.
Get Rich Slowly had an AMAZING post entitled Spare Change: Time to Travel Edition this week that shared tons of wonderful links that all focused on ways to save money while on a trip.
With credit card debt piling up, you might be thinking about transferring your balance to another card. Before you do you’ll want to read Moolanomy’s post that analyzes The Pros and Cons of Making a Credit Card Transfer.