Some nontraditional lenders use your history on social networks and online payment sites to determine creditworthiness. Is that better or worse than the way credit scores usually work?
Many people don’t understand credit scores, and some who do don’t like how they’re calculated. I know people who refuse to get a credit card because they think it encourages them to overspend in order to build a creditworthy reputation.
Well, here’s a different system, if not a widely used one: a credit score based on who your Facebook friends are. A lender called Lenddo uses your social network to make credit decisions, CNNMoney says. If you’re friends with someone who was late paying Lenddo back, that reflects poorly on you — especially if you interact with that person a lot.
“It turns out humans are really good at knowing who is trustworthy and reliable in their community,” Lenddo CEO Jeff Stewart told CNNMoney. If you’re not so good at it, that could ding your score.
Another company called Kreditech also uses Facebook, along with data from eBay and Amazon, and it even judges the way you type into the application form, CNNMoney says. People who type in all caps or use no capital letters are apparently, in its view, less creditworthy.
A third company, called Kabbage, claims it can determine creditworthiness — and dump money into your account — in just seven minutes, after peeking at your PayPal, eBay, Amazon or other online payment accounts. Of the three, only Kabbage operates in the U.S., but its loans are for small businesses.
Couldn’t these systems be easily gamed? A user could set up accounts that impress these lenders quickly — a Facebook account with just one very financially stable friend, an eBay account with positive feedback on purchases immediately paid for, and so forth.
Most traditional lenders in the U.S. use FICO credit scores, which are more difficult to influence. If you want to know what does and doesn’t go into those scores, check out the video below: