As Facebook Inc (NASDAQ:FB) and other social media move into more parts of our lives, it should be no surprise that they are starting to impact people’s credit scores. Multiple startups are rating people’s trustworthiness using social data, like whether or not your friends pay their bills on time, which isn’t captured by the traditional FICO score, writes Katie Lobosco for CNN Money.
"It turns out humans are really good at knowing who is trustworthy and reliable in their community," said Lenddo co-founder and CEO Jeff Stewart. "We're now able to measure [trustworthiness] through massive computing power."
Lenddo is mostly an alternative for people who don’t have a FICO score, and it only operates in Mexico, Colombia, and the Philippines, but the same concept could easily be used to rate people in other countries. The assumption is that people who are friends with people who miss bill payments are more likely to miss payments themselves, or vice versa, and that an aggregate rating of a person’s social circle is a good stand-in for an individual’s own credit rating.
Linking Facebook or Twitter to Kabbage
Kabbage, a startup that gives small companies cash advances, also claims to use social data to determine credit worthiness, but one of the criteria they use is whether the client links its Facebook Inc (NASDAQ:FB) or Twitter account to Kabbage. Kabbage co-founder Marc Gorlin says that companies that connect through social media are 20 percent more likely to pay their bills back on time, but there is no question that the company is also incentivizing behavior that increases its visibility.
Aside from being intrusive, it’s not clear that these techniques are really a good substitute for FICO scores. Credit expert John Ulzheimer of CreditSesame.com says that FICO scores don’t make use of nearly as many data points as startups like Lenddo, but that each of those points is “incredibly predictive of risk.” There are plenty of reasons why two people who know each other may have similar levels of risk (they may work together, for example), but anyone who knows siblings with differing attitudes toward money knows the limitations of such methods.
Lenddo and Kabbage are working with higher risk populations
For now, Lenddo and Kabbage are working with higher risk populations. It will probably take a lot more convincing before banks are willing to use social data models to decide whether or not to authorize a thirty-year mortgage.