Without a solid credit score, it’s almost impossible to get a loan, or even a line of credit. Without having collateral, like a house or a plot of land, borrowing money when you need it is simply not an option for most people.
But what if a lender used your social media score instead of your credit score? What if a credit company checked your Facebook, Twitter, LinkedIn, and Instagram accounts before deciding on your credit application?
It would be a game-changer for hundreds of thousands of people. Now there is new wave of start-ups that are starting to change the game.
The reasoning behind this move is sound, and the business acumen is salutary. A FICO score will automatically keep many people from being approved for credit. Having a few missed payments will sink your FICO score, and if you’ve never borrowed or had credit before, that will also work against you.
But there are a lot of people out there who work, and pay their bills, and still don’t have good credit. Companies like Lenddo, WePay, and Neo Finance will delve into your social media history and use that to help shape their answer to your application.
Social media can help you by answering the lender’s most important question – are you for real?
Risk and Fraud
For a lender, it is all about risk potential. A lender takes a risk every time a loan is given. Unsecured loans have a much greater risk, and thus must charge higher fees and interest in order to offset those loans that default. This is the reason why a mortgage has a low interest and a payday loan has high interest.
There is also a matter of fraud. Every year there are billions of dollars stolen online in credit and loan fraud. Identity theft is part of it, but fraudsters are innovative in coming up with new ways to get credit cards and loans they will never repay.
Between risk and fraud, lenders lose hundreds of millions every year, and keep the costs higher for everyone else.
An Imperfect but Interesting Approach
By using social media, this new wave of lenders hopes to cut through the fraud. With social media they can look through your history, see where you worked, see how big your network of friends is, and see if the applicant is a legitimate citizen who needs a loan, or a thief who has hijacked someone’s identity.
To do this, they pour through every inch of a person’s on-line life. Since so many people put a lot of their day to day life on the web, it can provide a lot of insight. Lenders can see if you have an extended family, verify you are working, and compare your social information with the info on the applicant to make sure it all matches up.
If you lose your wallet, or your credit card information gets stolen, chances are you will post about it. Lenders will see that as a red flag. A hacker might take your name, but they won’t update your Instagram, so a long period of inactivity to your social accounts will also be a red flag.
Is it a perfect screening process? Absolutely not. But it does help to paint a more complete picture of the borrower, instead of simply reducing them to a credit score.