In the not-so-distant future, your internet habits could help you determine how many homes to buy and the rate for your next car loan.
Does that sound ridiculous? Right now, your credit score – that three-digit number that tells lenders how responsible you are – is based on simple financial information, such as your payment history and debt level.
But 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 loans might hold in store and how to get the best rates on loans in the meantime.
Credit scores of tomorrow
Lenders could soon use the data from your browsing, search, and purchase history to create a more accurate credit score, researchers say.
Much of this information is publicly available, while some may need to be provided to credit bureaus. Together, this data forms your “digital footprint”.
The working paper cites other studies showing that the combination of credit information and your digital footprint “improves loan default forecast.”
It doesn’t mean that you would have a dedicated spy watching your every click. Instead, artificial intelligence and machine learning would be needed to extract that data and convert it into useful information in a credit report.
Is this good news for consumers?
While some people may be hesitant about lenders having access to their personal browsing data, researchers believe this approach could help borrowers who have been turned down by traditional financial institutions.
The end result would be that some “unlisted customers” would have access to credit, while customers with low to medium credit scores “may get or lose access to credit,” according to a previous 2018 study by the Frankfurt. School of Finance & Management. .
Take the pandemic: Although mortgage rates have fallen to historic lows, lenders have become much more picky when handing out the best deals.
Instead of focusing on delaying a loan payment, your buying and browsing history could tell banks you’re trustworthy, even if your traditional credit score has taken a few hits.
These changes in the way credit scores are calculated could be very helpful if you’ve had difficulty getting credit approved in the past. The Frankfurt study notes that their findings “provide suggestive evidence that digital fingerprints may have the potential to boost financial inclusion for the two billion adults worldwide who do not have access to credit.”
What are the risks ?
Before you start a digital makeover, like filling out your LinkedIn profile to show off your professional or academic accomplishments, keep in mind that these changes in the way your credit score is calculated are still speculative at this point.
Your Orwellian objections may have some merit. What about privacy and security issues? Research published on the IMF website recognizes that there would be an “efficiency-privacy trade-off.”
“The growing use of private data for financial services also raises a myriad of consumer protection and privacy issues that force the government to set standards for the collection and use of data,” the discussion paper said.
The document highlights fair lending rules in the United States that prohibit the use of gender or race information for lending decisions. So how fair is your digital footprint when it comes to assessing what kind of borrower you will be? And how will your information be protected against data breaches?
The researchers say new regulations will need to be set by governments so that big techs face the same data privacy requirements as banks. Big tech innovations are evolving at such a rapid pace that governments can take some time to catch up with the necessary policy.
Build that three-digit number
A good credit score will help you qualify for a mortgage, personal loan, or credit card, leading to higher loan limits and lower interest rates.
Credit scores are also used in other ways, for better or for worse. Even the owners can take a look before accepting your request.
Until the implications of collecting and using personal data have been further explored, you will need to improve your credit score the old-fashioned way. Here are four ways to increase your score:
1. Check your score regularly
Keeping an eye on your score will help you track your progress and alert you to any strange activity on your accounts. There are a number of online services that will allow you to view your score for free and send you an email whenever your score changes.
2. Establish a balance sheet
A long history of on-time payments is essential if you want a decent score. Specialty credit cards can help you build your credit history, especially if you can’t get approval for a regular card right now.
3. Consolidate your debt
Your debt level is the second largest contributor to your credit score. If you are struggling with high interest rates, like those on credit cards, consider turning your balances into a debt consolidation loan. All you need to do is take out a new low interest loan and use it to pay off your high interest debt. You only have one manageable monthly invoice left.
4. Beware of fraud
Identity theft and credit fraud can leave your score in the tank. Stay alert and regularly check your credit report for any unusual or suspicious activity. Some credit monitoring sites offer $ 1 million free identity theft insurance just for signing up.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.