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The credit system is one of the core systems of our society and it tends to lag behind social changes. There’s a perfect storm of social media platforms, big data, and fintech startups who are changing how we build credit and get credit scores.
• Problems with the System:
Credit scoring systems are designed to predict the likelihood of future repayment by a borrower and currently, the credit scoring industry has problems…
Problem 1: There is currently a near-monopoly in the system. Three companies who set the credit scores of everyone in most of the developed world: Equifax, TransUnion, and Experian
Problem 2: Older models are becoming outdated. Specifically, more companies are running credit checks for all sorts of reasons and each inquiry lasts for 2 years on your credit score. The problem is that too many inquiries drive down your credit and also, these frequent credit checks are insecure. Last year, Experian lost the SSNs and much more for more than 15m t-mobile customers. Additionally, credit ratings agencies give people a boost for having the same job for 5 years straight. That’s a problem in a world where 40% of the US workforce will be freelancers by 2020.
• Social Credit Scoring:
Today, live in a world where we share tons of personal data on social media platforms. Soon, credit scoring will likely include information from our use of platforms like Facebook or LinkedIn. Instead of analyzing our past behavior to predict our creditworthiness, models will work to build an idea of who we are based on the patterns we reveal about ourselves on social media.
• Real World Examples:
One example of a company leveraging social credit scoring is Germany-based Kreditech, a company that uses more than 20,000 datapoints from social platforms and other sources to determine the creditworthiness of people with no prior credit history. Recently, the World Bank made an investment in Kreditech because social credit scoring is likely to help millions of people get access to the global financial system.
Key takeaway: Your interactions online are already starting to have an impact on your financial health.
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