Lending money is an extremely risky business. Globally around 50{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616} of borrowers default on their loans. Finding ways to screen out candidates who are unlikely to repay loans is the most important aspect of a lender’s job.
With the improvement in science and technology, it is becoming easier for lenders to make the assessment on who is likely to pay back loans on time.
What is a credit score?
A credit score is a number given to individuals by banks based on their activity to determine their creditworthiness.
Depending on the credit score lenders charge a rate of interest. The general industry rate of interest is 13{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616} to 17{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616}. However, this score can change depending on your credit worthiness.
What are the Factors Affecting the Credit Score?
There are many factors that are used to determine the credit score. The most commonly used factors are:
- Payment History
The records of timely payments on your current and past credit accounts are checked. If you make late payments, it will result in a lower score.
- Public Records
The public records of bankruptcies, etc. and payment history nearly accounts for 35{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616} of your score.
- Credit History Size
The longer your credit history, the better confidence banks will have in giving you a loan. Credit history can account for almost 15{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616} of the credit score.
- Multiple Accounts
Opening new accounts in a short duration and having multiple accounts may negatively impact your score.
- Request for Your Credit Score
Every time your credit report is checked by anyone an inquiry is recorded. Many recent inquiries could negatively impact your score.
- Social Media Activity
Personality score is a fairly new introduction which uses data from social media to determine your score.
How is Social Media Used to Determine Your Score?
The personality score that is determined from your social media activity is based on every aspect of your account such as your friends, the location you are in, activities you enjoy.
For example, in case your feed on social media suggests that you are a gambler then your credit score will reduce thus requiring you to pay higher interest rate.
How much Impact can Social Media have on your Score?
Your Social Media activity can have a very high impact on your credit score. It has been reported that the personality score can bring down the interest rate to as low as 9{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616} or increase it to as high as 30{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616}, whereas the industry standard is around 13{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616} to 17{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616}.
Why is Social Media Score a Valuable Asset for Lenders?
The personality score helps bring down the risk of lenders by 8{ed162fdde9fdc472551df9f31f04601345edf7e4eff6ea93114402690d8fa616}. Since they are able to better understand the lifestyle and personality of the individual the lenders can assess the risk better.
For example using GPS tracking they were able to prevent a person’s girlfriend from borrowing money on his behalf. The said individual had previously applied for a loan which was rejected after which his girlfriend applied for the same loan in her name.
Thanks to the age of big data every activity online and offline is becoming a part of your identity. They all put together to contribute to your creditworthiness.
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