The Exchange

Your Friends Or Your Credit Score: Will You Have to Choose?

The Exchange

By Rod Ebrahimi

Have you ever worried that your credit score could be damaged by your Facebook (FB) friends? It’s not a pleasant thought, but for better or worse it’s a scenario that all of us will likely face in the next decade when it comes to measuring creditworthiness.

And it’s not just going to involve Facebook and Twitter social graph data, either. Rather, it could be any type of information about you that’s available online. But is this trend really any different from the very early days of credit? Back before credit bureaus and scores, businesses would track the creditworthiness of individual customers that they knew personally using ledgers and later decide whether or not to allow them to pay with “credit” next time they needed it.

So how can we protect ourselves from all these upcoming changes? And what can we expect in the next decade?

Don’t Break Up with Your Friends

So far, the company most famous for using Facebook data in its lending decisions is Lenddo, though there are many others including Wonga and LendUp. Lenddo has built a measure of creditworthiness that takes into account how many of your Facebook friends have defaulted on their own Lenddo loans. That’s right -- they might deny you a loan because your friend once failed to pay them back. For now, Lenddo only has data about friends who've borrowed from them in the past. But it's not hard to imagine a day when they have information about loans your friends have taken from other banks.

And the closer you are to someone (i.e. the more you interact with them on Facebook) the more weight Lenddo gives their behavior in determining your score. According to the Lenddo FAQs, the proprietary "Lenddoscore" is composed of three parts: (1) social data from your networks online to verify aspects of your application, (2) your trusted personal connections, for gathering insight into your overall “nature” and as a way to apply pressure in the case of missed payments, and (3) your financial performance history using Lenddo products.

But there's no need to panic and log into Facebook to “unfriend” all your friends who you suspect of having bad credit. Here’s why: Lenddo is still a small company, with only around 250,000 users worldwide, and most of its customers are in Columbia, Mexico, or the Phillipines. However, you should be aware that anything you post on Facebook today could potentially be used by a lender years from now to approve or deny your application for credit.

Clean Up Your Online Reputation

Kreditech is a company that is already bigger than Lenddo and has an even wider net when it comes to using Internet data for lending decisions. According to the company’s co-founder, they use over 8,000 separate pieces of data to evaluate an individual who applies for a loan. When you apply, they’ll ask you for your eBay (EBAY) and Amazon (AMZN) account information, and they’ll use your payment and purchase history on those sites to decide whether you’re creditworthy. Also, the company attempts to verify whether the computer you used for your application was your personal computer, a work computer, or if it belonged to someone else. Each of these data points - among others - is used in their decision.

A Good Thing?

Are there any positive implications of this trend? Actually, yes.

The good news is that these changes could make it easier for some people to get credit -- especially those who don’t have traditional credit scores and those whose situations are misread by traditional scoring models. This is one of the major shortcomings of existing scores and credit models; that is, they rely too heavily on your previous performance and major credit relationships.

New models like the new VantageScore 3 expand their reach to un- and underbanked customers as well as exclude resolved collections accounts from the model completely. Other online lenders like Kabbage grant loans to small businesses with limited credit history using alternative indicators to determine creditworthiness, such as real-time sales and delivery information (from eBay) and even social media data. This is a good thing, new models means more people and businesses can now get access to credit on affordable terms.

The bottom line is that while you don't need to worry about dumping your Facebook friends anytime soon, you should remember that credit scoring (and many other facets of our lives) will become increasingly dependent on the use of online data over the next decade. To protect yourself, think twice about what types of information you are posting online. But also be open to the many new opportunities - such as alternative ways to qualify for loans - that should come as a result of this trend.

Rod Ebrahimi is CEO of ReadyForZero.com.

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