Could Your Social Media Habits Influence the Odds of Getting an Online Loan?
Your three-digit credit score is one of the key metrics used by financial institutions to determine your creditworthiness. But what happens if you have a bad score or no score at all?
In the future, your online activity could factor into your odds of getting a loan online. Social media posts, online shopping purchases, and even browsing history may one day affect your creditworthiness.
What is Creditworthiness and How is it Measured?
Your creditworthiness is a measure of how worthy you are of receiving a loan or line of credit. It represents the likelihood you’ll fulfill your debt obligations. As a result, your creditworthiness reflects a lender’s willingness to grant you funds.
So how does the financial world determine your creditworthiness? Traditionally, financial institutions look to your credit report and score for insights into your past borrowing behavior. Your report details how you’ve handled previous installment loans, credit cards, and lines of credit.
You’ll earn good credit (and high creditworthiness) if you consistently pay bills on time and limit how much debt you carry over on a line of credit. But you’ll produce bad credit if you pay bills late, let accounts go delinquent, or max out your credit cards without paying them off quickly.
Bad Credit Can Complicate Getting a Personal Loan
Every financial institution has its own limits of creditworthiness. Some of the biggest banks will outright deny you funds if your score is low enough, as they consider your past borrowing behavior a red flag for the future.
Other lenders, on the other hand, may only raise their rates to offset the risk they take on by lending to someone with poor creditworthiness.
This is good news if you run into a tough financial emergency before you can raise your score. In the event you don’t have savings or an available credit card, you can turn to online direct lenders for an alternative.
One of the benefits of working with direct lenders is that they supplement your credit check with other details about your finances to determine if you qualify for an online loan. This additional information may include your income, pay schedule, and employment history.
This information looks at real-time details about your finances to determine how easily you’ll pay back what you owe, rather than a retrospective look at your past borrowing history
Online direct lenders may use this extra info to determine your creditworthiness, set their rates, and/or limit the size of the online loan you receive.
It might be easier to qualify with online loan direct lenders as a result. This is especially true if you’re still carrying around a black mark in your file from a past borrowing mistake you don’t intend to repeat.
What if You Don’t Have a Credit Score at All?
There are an estimated 62 million people in the U.S. who haven’t borrowed enough to generate a score. Their files are so thin they’re considered invisible to financial institutions. Add to that number another 26 million Americans who have absolutely zero history with a nationwide consumer reporting agency.
Together, zero, thin or invisible credit can make borrowing almost impossible, but some online direct lenders are aiming to change that.
Social Media Activity Provides Alternative Data for Creditworthiness
Despite not having a credit score, many of these “invisible” people may still have a need to borrow. If their pipes burst and they run out of savings, an emergency loan can help them get back on their feet.
Some online direct lenders recognize this as an opportunity, which is why they’re starting to collect alternative data to assess a borrower’s risk.
Right now, this alternative risk assessment may include looking at things that aren’t usually included in your credit report — things like rent, utility bills, or cell phone payments.
However, credit agencies are proposing expanding this data to include “soft” non-financial data that isn’t as quantifiable as a bill payment. They’re cautiously planning to look at job titles, education levels, and social media posts.
One day, your vacation photos or posts on a community board could play a role in whether a lender grants you funds.
Why? There’s still a lot to uncover from this new assessment bracket.
Your online behavior could be simply a character reference to see the types of posts you make and engage with. Do you interact with friends, family, and businesses positively? Do you like inflammatory or fringe political posts? Do you have a large following? What kind of posts do you make?
For now, there’s no way to tell how these would factor into your creditworthiness, or who would be the arbiter of online behavior. And therein lies the problem.
Is Involving Social Media a Good Idea?
According to the International Monetary Fund, expanding risk assessments to include social media may broaden life-saving borrowing opportunities to people usually denied online loans.
While you may not have borrowed enough in the past, there’s a good chance you’re online. Your Instagram or LinkedIn account could show you’re a high earner who’s responsible with their cash, even though your lack of traditional credit would paint a different picture.
On the downside, this soft data will be hard to quantify, stratify, and standardize. Traditional risk assessment measures, by comparison, are highly regulated by governments and third-party watchdogs. Without similar standards, alternative data could be prone to errors, biases, and privacy concerns.
Time will tell how it will unfold. Until then, work on building good credit. Regardless of how social media will be involved, positive entries will never not come in handy.
This article has been published in accordance with Socialnomics’ disclosure policy.