In the not-too-distant future, your internet habits could help determine how much house you can buy and the rate on your next auto loan.
Sounds ridiculous? Right now, your credit score — that three-digit number that tells lenders how responsible you are — is based on simple financial information, like your payment history and debt level.
But research posted to the International Monetary Fund (IMF) website suggests companies will soon be looking at a lot more data to get an accurate picture of the risk you pose as a borrower.
Here's what the future of lending might hold and how to get the best rates on loans in the meantime.
The credit scores of tomorrow
Lenders could soon use data from your browsing, search and shopping history to create a more accurate credit score, researchers say.
Much of that information is publicly accessible, while some might need to be provided to credit bureaus. Taken together, that data forms your “digital footprint."
The working paper cites other studies showing that combining credit information and your digital footprint “improves loan default predictions.”
That doesn't mean you'd have a dedicated spy watching your every click. Instead, artificial intelligence and machine learning would be needed to scrape this data and convert it into useful information in a credit report.
Is this good news for consumers?
While some people may balk at the idea of lenders having access to their personal browsing data, researchers believe this approach could help borrowers who’ve been denied by traditional financial institutions.
The end result would be some "unscorable customers" gaining access to credit, while customers with a low-to-medium credit score "can either gain or lose access to credit," says an earlier 2018 study from the Frankfurt School of Finance & Management.
Take the pandemic: Though mortgage rates have fallen to historic lows, lenders became much pickier when doling out the best deals.
Instead of focusing on whether you were late on one loan payment, your purchase and browsing history could tell banks you're trustworthy even if your traditional credit score has taken some dings.
These changes to how credit scores are calculated could be very helpful if you have had trouble getting approved for credit in the past. The Frankfurt study notes that their findings “provide suggestive evidence that digital footprints can have the potential to boost financial inclusion for the two billion adults worldwide that lack access to credit.”
What are the risks?
Before you start giving yourself a digital makeover, like filling out your LinkedIn profile to show your professional or academic accomplishments, keep in mind these changes to how your credit score is calculated are still speculative at this point.
Your Orwellian objections may have some merit. What about privacy and security concerns? The research posted to the IMF site acknowledges there would be an “efficiency-privacy trade-off.”
“The increasing use of private data for financial services also raises a myriad of consumer protection and privacy issues that require the government to set standards for data collection and use,” the working paper says.
The paper points to fair lending rules in the U.S. that prohibit using gender or race information for lending decisions. So how much of your digital footprint is fair game when it comes to evaluating what kind of borrower you’ll be? And how will your information be kept safe from data breaches?
The researchers say new regulations will need to be set by governments so that Big Tech faces the same data privacy requirements as banks do. Big Tech innovations move at such a fast pace, it may take a while for governments to catch up with the necessary policy.
Building that three-digit number
A solid credit score will help you qualify for a mortgage, personal loan or credit card, unlocking higher borrowing limits and lower interest rates.
Credit scores are used in other ways, too, for better or worse. Even landlords may take a peek before accepting your application.
Until the implications of collecting and using personal data have been studied further, you’ll need to improve your credit score the old fashioned way. Here are four ways to give your score a boost:
1. Check your score regularly
Keeping tabs on your score will help you track your progress and alert you to any strange activity on your accounts. A number of online services will let you see your score for free and email you any time your score changes.
2. Establish a track record
A long history of on-time payments is essential if you want a decent score. Specialized credit cards can help you build your credit history, especially if you can’t get approved for a normal card right now.
3. Consolidate your debt
Your debt level is the second biggest contributor to your credit score. If you’re struggling with high interest rates, like the kind on credit cards, consider rolling your balances into a debt consolidation loan. You simply take out a new low-interest loan and use it to pay off your high-interest debt. Then you’re left with just one manageable monthly bill.
4. Watch out for fraud
Identity theft and credit fraud can leave your score in the tank. Stay vigilant and check your credit report regularly for unusual or suspicious activity. Some credit monitoring sites provide $1 million in free identity theft insurance just for signing up.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.