What is Credit Scoring?
Whenever a credit is applied in any form such as Loan or refinance, potential lenders strive for information about applicant’s financial status and background that is considered as Credit Score that is usually provided by credit bureaus or other analysts. This credit score can impact lender’s decision to for credit limit or even terms of credit. The consumers with high scores are eligible to obtain credit easily and that too on better terms that include APR (Annual Percentage Rate), grace period and other contractual loan obligations. Credit scores have an extensive impact on opportunities and social inequality as credit can be undertaken for various purposes like buying a house, starting a business or may be for higher education.
Antiquity of Credit Scoring Analysis
Traditionally, Lenders used to bear the risk in approving the loan credits. Lenders and banks used to provide loans on the basis of credit scoring technology provided by credit bureaus. The credit score previously was calculated on five scoring factors that majorly included:
- Past loan and credit applications
- On time payments
- Type of loan or credit used
- Credit History
- Capacity Used
Throughout the procedure and strategy followed for loans, the lack of reliable data about a loan applicant’s credit history has resulted in to lump all sub-prime borrowers as high risk bets for banks. These applications were either rejected or were offered loans at an excessive rate which was not preferred by the applicants.
Evolution of Social Media for Credit Scoring
The major crisis faced by using the traditional sources for data or credit scoring was the lack of sufficient and reliable data. Thanks to the explosion of social media and smart devices that enabled huge sets of data which can be used. Initially, most of the data seems to be irrelevant to finance but big data analytics can be used to make somehow accurate predictions about a user’s lifestyle and amiability. Lumata Digital can help you gather data flawlessly via Big Data Analytics. Using Social Media to determine Credit Score helps to get an insight to whether the borrower is trustworthy or not. Before choosing social media as the source of information for taking or providing credit, you must know the assessment process, the benefits that it offers and the challenges that you may face while using it.
Surprising Ways in which Social Media can be used for Credit Scoring
The basic key to analyze Social Media data is to have the groundings clear for what you exactly looking for. Data from professional networks can be retrieved to find following information:
- Person’s employment history
- Nature of job profile
- Stability in career
- How frequently the person switches the job
Apart from the career, an individual’s social network and connections can also be analyzed to fetch information about his reputation, his friend’s circle, and people with credible financial history.
There are different ways in which Social Networking platforms can be used for credit scoring:
- Verifying the job information available on LinkedIn is just to begin with
- Facebook and Twitter profiles can be used to check applicant’s connections and background.
- For small businesses, negative reviews on Ebay will contribute to leave a negative impact on credit score.
In addition, gathering data via social media opens a way to many other set of social demographics like age, income group and so on. Many lenders are already analyzing social media profiles of the applicants for providing loans. Apart from this, the concept of social media credit scoring is likely to reach at the height of success in near future.
There are certain challenges or adverse effects of using social media for credit scoring:
- Privacy – Social media insights are something considered as a personal stuff and most of the people are indifferent about their digital privacy. So it becomes a barrier as the consumers are still hesitant to provide access to sensitive personal information.
- Discrimination– Because social networks reflect the makeup of offline communities, consumer advocates have voiced concern that social media data will result in discriminatory outcomes in a credit lending context.
- Inaccuracy / Fraud – Although, most of the prominent social media sites strongly reassure user authenticity through various identity verification measures some of these platforms are susceptible to identity fraud and may fail to present an accurate profile of an individual. In addition, users may also be further incentivized to game the system in order to receive favorable credit terms (e.g., manipulating their “friends” list or commentary prior to a loan application). Credit algorithms which rely on incorrect or indefensible data and modeling techniques will fall short of the Fair Credit Reporting Act (FCRA) requirements.
Either you prefer to go for credit scoring via social media analysis or big data analysis; it is highly recommended to hire an authorized firm to gather all the data required for credit scoring. Lumata Digital enables you to get the data with authentic credit scores based on real time interactions of users. Lumata Digital offers a wide variety of tools that works as big data engines for social media insights and mobile phone behavioral data such as call records to assess creditworthiness. You should always choose wisely before you offer a lump sum amount of money to anybody on credit. Think twice before you place you money at stake.