How do you know whether to loan someone money? Many banks rely on traditional credit scores that latch onto historical data, such as on-time credit card payments, utility payments, etc., in the hopes that an individual’s payment history is a good predictor of their ability to repay in the future.
That sounds all well and good but what do we do about people who have no credit history? One option would be to treat this as a homogenous group – just charge them higher rates and accept some defaults here and there. Diversify and move on. Another option is to source data from non-traditional sources. Cignifi is a great example of a company offering financial products to the underbanked. All the applicant needs is a mobile phone and Cignifi can turn their call, message, and payment history into a reliable (?) credit score.
And it looks like some companies are prepared to take it a step further – analyzing data from Facebook, eBay, and Amazon to build social interactions into their models. There are more details in the article below, but essentially the question boils down to whether a default by your friend indicates a higher risk of default by you. Looks like Facebookers need to trim off those peripheral “friends” before they apply for that next car loan.
http://money.cnn.com/2013/08/26/technology/social/facebook-credit-score/index.html?hpt=hp_t2
Thanks to Christy Milliken, an attorney in Washington DC, for bringing this article to my attention.