NEW YORK (MainStreet) — Turned down for a loan - maybe a personal loan, perhaps a car loan, definitely a mortgage - and know this: non-traditional credit scoring just may be your savior as growing numbers of lenders increasingly use information that had always before been ignored to make what they believe are fairer, more inclusive, lending decisions.
Credit scores, for decades, have revolved around a narrow data set - credit card performance, auto loans, mortgages, perhaps a personal loan with a bank, and not much more. But a lot more info may be just as telling about a person’s financial life. Like what? Anything and everything from SAT scores (the higher, the better) to successful repayment of a payday loan and definitely also rent payments (until recently widely ignored even by mortgage companies) and maybe utility payments for electric, cable, even cell phones.
The goal: safely extending more credit to consumers who, for many reasons, may have found themselves left out in traditional credit scoring. "In the future, consumers will see lenders using a myriad of data for underwriting,” said James Garvey, CEO of Self Lender, a company that helps individuals without much of a credit history build one.
How quickly will this be embraced?
“This will happen sooner than self-driving cars,” said Jeff Stewart, CEO of Lenddo, which uses social media profiles to help assess an individual’s creditworthiness.
Who currently stands to most benefit from the move to factor in new sources of data: probably people in the middle of the credit pyramid. Borrowers with FICO scores north of 800 won’t gain much because there is little they cannot get anyway. Borrowers with FICO scores south of perhaps 500 also won’t gain much, because it is hard to see many lenders gaining enough confidence from new data to pull the trigger on a loan. But that leaves tens of millions of Americans in the middle who just may benefit if more - new - data can be cranked into their scores.
“It also extends to billions in countries with undeveloped credit infrastructures - India, Malaysia, Mexico, Chile, and many more - who will benefit,” said Stewart.
What’s making this possible, added Stewart, is “big data and processing power.” Suddenly it has become technically feasible, and economically realistic, to crunch mountains of data from disparate sources such as Facebook, Twitter, LinkedIn, email, text messages and more. And these data, say the advocates, are gold in assessing a person’s character, reputation and tenacity, factors that matter a lot in repaying a loan.
Note: this non-traditional scoring is by no means mainstream yet. “Alternative data is still in a trial stage,” said Thomas Bright, who blogs for ClearPoint Credit Counseling Solutions. The biggest lenders are known to be curious about big data - but none is known to have decided to factor it into lending decisions.
But many companies are galloping into this space.
At FactorTrust - a large provider of credit scoring for underbanked consumers in the U.S. - Dan Richards, head of analytics, said the company looks at performance on payday loans, auto title loans, subprime auto lenders, among other unconventional data points.
At Upstart - which targets consumers who are college graduates and under 30 years of age - the typical customer who comes in search of a personal loan, usually used for debt consolidation, has a thin credit file or perhaps one with a few dings. So Upstart looks at SAT scores, Grade Point Average, also college major (Science Technology Engineering Math, so called STEM, majors are deemed better credit risks).
At Mirador, which specializes in small business lending, CTO William Beaver said often small businesses, too, have thin credit files so Mirador looks at a range of data, and, he said, how a business handles its social media channels and reputation seems to be a good indicator of creditworthiness.
Lenddo, for its part, believes “you hang out with people who share your world view,” said Stewart. If the company finds many of your Facebook friends have recently filed for bankruptcy, that’s not a good sign. “We can look at reputation on a global scale and we have proven it correlates with the likelihood you will repay a loan,” he said.
Get the picture: different companies are using different data sets as they all race to validate their methods. For the consumer what this means is a big takeaway: hunt for the company whose algorithms most closely align with your particular strengths.
One other to-do: “Take out a small loan and pay it back,” said Lenddo’s Stewart. “That is the single best thing you can do to raise your credit profile.”