Banks examine all kinds of data, but credit scores still matter mostRe
Researchers and startups say al kinds of weird data can predict your creditworthiness. What kind of smartphone you have, who your friends are and how you answer survey questions may foretell how likely you are to pay back a loan.
Don't expect this alternative data to displace the three-digit number most lenders use, though. Credit scores still matter - a lot.
Lenders use credit scores to decide whether you get loans and credit cards, plus the rates you pay. Scores are also used to determine which apartments you can rent, which cellphone plans you can get and, in most states, how much you pay for auto and homeowners insurance.
The central problem with credit scores is that they can't be generated unless people actively use credit accounts. Millions of people don't but they may still be creditworthy. Alternative data is being used to sniff them out.
Some U.S. lenders, for example, factor in how often people change addresses, how they pay noncredit bills such as rent or cellphone plans and how they handle their bank accounts. FICO, the leading credit-scoring company, has found that people who have savings, maintain higher balances in their checking accounts and don't overdraft may be good credit risks. The company has created a new "opt in" score that would allow lenders, with consumers' permission, to factor in bank account behavior when evaluating loan applications.
In Russia, applicants can get loans based on answers to "psychometric" surveys that evaluate their verbal and arithmetical skills. Meanwhile, a study of a German e-commerce company's transactions found that people's digital footprints" - whether or not they use iPhones, have numbers in their email addresses and shop at night - can predict their risk of default. (If you're curious, iPhone users are less likely to default than Android users, while those who have email numbers or shop late are more likely to default, according to the study.)
Not all alternative methods will pass muster with regulators and gain widespread acceptance with lenders. Social media feeds, for example, showed some early promise, but enthusiasm for that idea waned once lenders considered the regulatory hurdles.
"No bank wants to be tagged with they denied me because of my Twitter feed" regardless of how predictive it may be," say credit expert John Ulzheimer.
Similarly, the credit scores of people in your household and in your social circle may predict how creditworthy you are, but mainstream enders aren't likely to embrace scores based on other people's behavior.
"Factors should be palatable and fair in addition to being predictive and compliant," say Ethan Dornhelm, FICO's vie president for scores and predictive analytics. "Saying You've got the wrong friends' - it doesn't sit well."
Much of the research has found that alternative data works best when used in conjunction with, rather than as a replacement for, traditional credit scores. So the best way to keep your financial options open remains the same: keeping your credit sores strong.
That means you should:
Have credit. If you're trying to build or rebuild your scores, consider a secured card that gives you a line of credit equal to the deposit you make with the issuing bank. Other options include a credit-builder loan from a credit union or online lender or being added as an authorized user to a creditworthy person's account.
Actively use credit. You don't need to carry a balance on your credit card, which is fortunate: Credit card debt is usually expensive and almost always unwise But regularly using credit cards helps maintain your scores. So can paying installment loans, such as student loans, car loans and mortgages.
Avoid using too much credit. Maxing out your credit cards or applying for too many cards in a short period can ding your scores. the Less of your credit limit you use, the better, even when you pay in full every month.
Liz Winston is a columnist at NerdWallet, a certified financial planner and author of Your Credit Score.
Don't expect this alternative data to displace the three-digit number most lenders use, though. Credit scores still matter - a lot.
Lenders use credit scores to decide whether you get loans and credit cards, plus the rates you pay. Scores are also used to determine which apartments you can rent, which cellphone plans you can get and, in most states, how much you pay for auto and homeowners insurance.
The central problem with credit scores is that they can't be generated unless people actively use credit accounts. Millions of people don't but they may still be creditworthy. Alternative data is being used to sniff them out.
Some U.S. lenders, for example, factor in how often people change addresses, how they pay noncredit bills such as rent or cellphone plans and how they handle their bank accounts. FICO, the leading credit-scoring company, has found that people who have savings, maintain higher balances in their checking accounts and don't overdraft may be good credit risks. The company has created a new "opt in" score that would allow lenders, with consumers' permission, to factor in bank account behavior when evaluating loan applications.
In Russia, applicants can get loans based on answers to "psychometric" surveys that evaluate their verbal and arithmetical skills. Meanwhile, a study of a German e-commerce company's transactions found that people's digital footprints" - whether or not they use iPhones, have numbers in their email addresses and shop at night - can predict their risk of default. (If you're curious, iPhone users are less likely to default than Android users, while those who have email numbers or shop late are more likely to default, according to the study.)
Not all alternative methods will pass muster with regulators and gain widespread acceptance with lenders. Social media feeds, for example, showed some early promise, but enthusiasm for that idea waned once lenders considered the regulatory hurdles.
"No bank wants to be tagged with they denied me because of my Twitter feed" regardless of how predictive it may be," say credit expert John Ulzheimer.
Similarly, the credit scores of people in your household and in your social circle may predict how creditworthy you are, but mainstream enders aren't likely to embrace scores based on other people's behavior.
"Factors should be palatable and fair in addition to being predictive and compliant," say Ethan Dornhelm, FICO's vie president for scores and predictive analytics. "Saying You've got the wrong friends' - it doesn't sit well."
Much of the research has found that alternative data works best when used in conjunction with, rather than as a replacement for, traditional credit scores. So the best way to keep your financial options open remains the same: keeping your credit sores strong.
That means you should:
Have credit. If you're trying to build or rebuild your scores, consider a secured card that gives you a line of credit equal to the deposit you make with the issuing bank. Other options include a credit-builder loan from a credit union or online lender or being added as an authorized user to a creditworthy person's account.
Actively use credit. You don't need to carry a balance on your credit card, which is fortunate: Credit card debt is usually expensive and almost always unwise But regularly using credit cards helps maintain your scores. So can paying installment loans, such as student loans, car loans and mortgages.
Avoid using too much credit. Maxing out your credit cards or applying for too many cards in a short period can ding your scores. the Less of your credit limit you use, the better, even when you pay in full every month.
Liz Winston is a columnist at NerdWallet, a certified financial planner and author of Your Credit Score.
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