Credit scoring is usually done with very traditional methods. After all, the Fair Credit Reporting Act and Equal Credit Opportunity Act both ensure that lenders and credit reporting agencies follow strict guidelines. But it’s possible that social media and some new proprietary technologies could soon play a role in how scoring is done.
The Evolution of Credit Scoring
Let’s begin by acknowledging something that doesn’t get enough attention — credit scoring isn’t a perfect science. Not only are there some pretty subjective measures involved in scoring, but credit reports often include a litany of errors that have to be uncovered and corrected. In fact, the unreliable nature of credit reporting and scoring is so significant that it’s given rise to an entire sub-industry, with companies specializing in credit repair.
Having said that, it shouldn’t come as a surprise that credit scoring evolves over time and that reporting agencies are always looking for ways to come up with more accurate and telling scores that creditors can rely on. One of the more interesting developments is the inclusion of social media and the potential it has to change the entire finance industry.
As Financial Times reporter Jeevan Vasagar explains, "Traditional credit scoring looks to the past and present as a guide to the future. But what would it be like if many data points, from psychometric testing to posts on Facebook or LinkedIn, could be used to build up a more accurate portrait of creditworthiness?"
That’s exactly what entrepreneurs like Rene Griemens, CTO of the FinTech company Kreditech, are trying to make happen. "Social media tells you a lot about the person," Griemens says in an interview with Vasagar. "What type of friends do you have? We may be able to see whether he has friends who have already repaid a loan to us — that usually is a good indicator."
Whether you realize it or not, social media profiles say a lot about the person behind them. If you’re spending a lot of time bar-hopping, it’s probably a good indication that you’re not making great decisions with your money. On the other hand, if your profile shows that you’re regularly attending conference events and having original content published in industry journals, this is a sign that you’re a responsible and reputable individual who can be trusted.
FICO is currently working with credit card companies to use new methods to decide what size loans people can handle. Non-traditional sources like social media are becoming more popular, though there’s still a way to go before social media plays a significant role in the scoring process.
The good news for borrowers is that social media is something they can actually control. Unlike other metrics that are based on concrete data — such as payment history and credit utilization ratios — an individual has total control over social profiles.
If you’re looking for a way to improve your creditworthiness, it wouldn’t hurt to spend some time refining your social media presence. Begin with things like your profile picture, education history, job history, and pictures. It might even be worth your time to purge your friends list.
In China, peer-to-peer lender Jubao says it actually gives an advantage to borrowers who are Facebook friends with celebrities. As the company explains, "You must be to some extent trustworthy . . . since otherwise you wouldn’t have such friends."
The fact that you can manipulate your social media presence is good news for you, but is a major con for creditors who are using it to gain what they believe to be an accurate picture of who you really are.
Lenders who want to use your social media accounts in the approval process must receive authorization from you before they can access your accounts. While not everyone will manipulate their profiles, some will. This begs the question: How objective is social media when it comes to credit scoring?
There are also concerns over bias and privacy. As previously noted, the Fair Credit Reporting Act and Equal Credit Opportunity Act both ensure that things like age, race, gender, and religious affiliations don’t impact lending habits. When social media is involved, it’s virtually impossible to remain blind to these factors. How this will influence lenders remains to be seen.
The law prohibits lenders from making lending decisions based on any scoring model that is not "empirically derived [and] demonstrably and statistically sound."
Social media certainly doesn’t meet these criteria yet, but lenders argue that it’s just one scoring model being used. For now, it only complements more objective models. In the future, could it replace these models?
Time Will Tell What Role Social Media Plays
Clearly, credit reporting agencies and lenders like the idea of having access to as much information as they can. Social media obviously contains massive amounts of information on would-be borrowers, but the question is whether or not it’s an objective and/or ethical means of measuring credit-worthiness. Only time will tell.
Larry Alton is a professional blogger, writer, and researcher. A graduate of Iowa State University, he's now a full-time freelance writer and business consultant. Currently, Larry writes for Entrepreneur.com, Inc.com, and Forbes.com, among others. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing. Follow him on Twitter (@LarryAlton3), at LinkedIn.com/in/larryalton, and on his website, LarryAlton.com. To read more of his reports — Click Here Now.
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