Your creditworthiness could soon depend on your web history
In the not too distant future, your internet habits could help determine how much home you can buy and the size of your next car loan.
Sound ridiculous? Right now, your credit score – that three-digit number that tells lenders how responsible you are – is based on simple financial information like your payment history and debt level.
However, research published on the International Monetary Fund (IMF) website suggests that companies will soon be looking at a lot more data to get an accurate picture of the risk you pose as a borrower.
Here’s what the future of lending could bring, and how to get the best lending rates in the meantime.
According to researchers, soon lenders could use data from your browsing, search, and shopping history to build a more accurate credit score.
Much of this information is publicly available, while some may need to be made available to credit reporting agencies. Taken together, these data form your “digital footprint”.
The working paper cites other studies that show that combining credit information and your digital footprint “improves credit default predictions.”
That doesn’t mean you have a dedicated spy monitoring your every click. Instead, it would require artificial intelligence and machine learning to scrape off this data and turn it into useful information in a credit report.
Is this good news for consumers?
While some people may disapprove of the idea that lenders have access to their personal browsing information, researchers believe this approach could help borrowers who have been turned down by traditional financial institutions.
The end result would be that some “unremarkable customers” get access to credit, while customers with low to medium credit scores “may get or lose access to credit,” according to an earlier study by the Frankfurt School of Finance & Management from the year 2018.
Take the pandemic: although mortgage rates have fallen to all-time lows, lenders have become much more picky about the best deals.
Rather than focusing on whether you’ve defaulted on a loan payment, your purchase and browsing history can tell banks that you are trustworthy even if your traditional creditworthiness made some mistakes.
These changes to how creditworthiness is calculated can be very helpful if you have had problems obtaining loan approval in the past. The Frankfurt study found that its results “provide clear evidence that digital footprints can have the potential to promote financial inclusion for the two billion adults worldwide who do not have access to credit”.
What are the risks?
Before you start giving yourself a digital makeover, e.g. B. In filling out your LinkedIn profile to show your professional or academic achievements, remember that these changes to the calculation of your creditworthiness are still speculative at this point.
Your Orwellian objections may have some justification. What about privacy and security concerns? The study published on the IMF website confirms that there would be an “efficiency-data protection compromise”.
“The increasing use of personal data for financial services also raises a variety of consumer protection and privacy issues that require the government to set standards for data collection and use,” the working paper reads.
The paper points out fair lending rules in the US that prohibit the use of gender or race information in lending decisions. So how much of your digital footprint is fair game when it comes to judging what kind of borrower you will be? And how is your data protected against data breaches?
The researchers say that new regulations need to be set by governments so that big tech is exposed to the same data protection requirements as banks. Big tech innovations evolve so quickly that it can take governments a while to catch up with the necessary policies.
Build that three digit number
A solid credit score will help you qualify for a mortgage, personal loan, or credit card, freeing up higher credit limits and lower interest rates.
Credit scores are used for better or for worse in other ways as well. Landlords can also take a look before accepting your application.
Until the effects of collecting and using personal information have been further investigated, you need to improve your credit the old-fashioned way. Here are four ways to improve your score:
1. Check your score regularly
Keeping an eye on your score can keep track of your progress and alert you to strange activity on your accounts. A number of online services allow you to see your score for free and to send you an email whenever your score changes.
2. Create a track record
A long history of on-time payments is essential if you want to get a decent result. Specialized credit cards can help you build your credit history, especially if you just can’t be approved for a regular card.
3. Consolidate your debt
Your debt level is the second largest factor in your creditworthiness. If you are struggling with high interest rates, such as credit cards, consider converting your balance to a debt consolidation loan. You simply take out a new low-interest loan and use it to pay off your high-interest debt. Then all you have left is a manageable monthly invoice.
4. Watch out for fraud
Identity theft and credit fraud can leave your score in the tank. Stay vigilant and regularly check your credit report for any unusual or suspicious activity. Some credit monitoring sites offer free $ 1 million identity theft insurance just for signing up.
This article is for information only and is not intended as advice. It is provided without any guarantee.