Credit Scoring with Social Network Data

Credit Scoring with Social Network Data

Ever wondered how your loan application is being processed in the backend? To some, the concept of credit scoring might sound overly abstract, but you must have come across it at some point in your life. 

“You don’t have a good credit history, that’s why your loan gets rejected.” 

Sounds familiar? 

Traditionally, banks would use the applicants’ credit score to determine how much risk they pose as a borrower. The higher their score, the more likely they are to be accepted for a loan or a credit card. 

Generally, most credit firms calculate the credit score by looking at 3 main factors:

• the amount of loans you have 
• the number of bank accounts you have 
• timeliness of your bill payments

But there is a new breed of scoring model being used by companies now — social scoring. This new scoring model uses multiple sources of “social information collateral” to gather the applicants’ information across a variety of social networks. 

This in turn helps verify an applicant's identity and even goes further to facilitate the approval of a credit application.

 

Now, even mobile phone giants and banks are working with tech companies to collect customers’ social data before issuing contracts or loans. 

Tech companies have greater access to soft information as compared to banks. They can easily collect data from Facebook, Instagram, LinkedIn, and Twitter to identify the customers' spending habits, earnings as well as their age, address, and employment. 

It is also more convenient in a sense that tech companies are able to communicate with customers via their messaging platforms. Therefore, freeing the limitation imposed by banks on relying to meet customers physically.

 

Social scoring for first time home buyers

The main idea behind social scoring is twofold:

1. To provide applicants who have limited credit history an alternative way to prove their creditworthiness.
2. To provide lenders with additional information to supplement what they already know from the credit bureau report. 

In a sense, it is used by Fintech mortgage lenders to ‘fill’ the gaps that aren’t covered by traditional credit reports. 

Younger people or the millennials are the target segment here as a large number of them don’t have a complete credit history. But what they do have is an extensive social footprint.

Making it compelling for lenders to turn this information into an alternative way to analyze the applicants’ risk.

For instance, some Fintech mortgage lenders review the borrowers’ LinkedIn profiles to measure their income stability with regards to their length of employment. 

Borrowers who remain in the same job for a longer period of time are a better risk than someone who switches between jobs.

Mortgage lenders can also go as far to predict the employment prospects of loan applicants.  

The scoring model is able to do that by checking the professional skills or certificates listed in their LinedIn profiles. They also assess whether the applicant has high-quality network connections.

As a real-world example, Neo Finance, a credit scoring Fintech company, even offers lower interest rates to applicants with good quality connections on LinkedIn. 

So, how does social scoring really work in real life?

Before any credit analysis take place, social scoring platforms will require applicants to grant access to their social media or email accounts. Once ‘inside’, an algorithm (rather than a real person) will begin to analyse the information in the applicants’ profiles.

A number of different social scoring platforms exist and vary in terms of how they work, but generally, they aim to assess the different aspects of an applicant's social footprint. 

Here are some common factors they look for in an applicant’s social profile:

• mobile phone history 
• web searches for payday loans 
• personal information
• public status updates or network activities
• similarity to established loan recipients
• borrower’s social circles
• spending pattern & money management
• anomalies between the information provided in an application across borrower social media accounts.

An applicant’s social media score is largely derived from the information they shared on their public feed. 

For example, if an applicant is regularly checking in at pubs or high-end restaurants on Facebook and constantly complaining about money problems, a potential lender might see this as evidence of money management issues. Chances are, in this case, the borrower’s loan might be rejected.

Moving forward, experts also see the possibility of social scoring platforms to analyze data from applicant’s browsing, search, and purchase history in order to create a more sophisticated scoring model.

In general, social scoring will result in better chances of lending to borrowers who would probably be denied their loan application in the first place.

 

But is social scoring really that perfect?

Fundamentally, social scoring is especially helpful to those who have limited credit history. However, it is not all rainbows and clouds. There are limitations to it as well. 

 

Some applicants could potentially try to game the system by editing and influencing their social media feeds. They could also manipulate the algorithm by deleting transactions in their email or other key information. 

This will eventually skew the accuracy of the model to analyze risk. 

Also, preventing algorithmic discrimination is also a challenge by most Fintech lenders. It is not as easy or direct to hold companies liable to the laws that protect everyday consumers like you from unfair credit practices. 

For example, if the applicant is living in a low-income community, they’re likely to have friends and family with similar income levels. They are also more likely to have someone in their extended network with a poor repayment history. 

If the scoring algorithm didn’t take into account its own biases, chances are, that individual will never get his/her loan approved. 

 

Conclusion

But it’s not all gloom and doom. Social scoring is simply a way for lenders to further understand the borrower’s credit profile. The data points collected will not take precedence over the information found on the applicants’ credit report.

With that in mind, if you’re interested in applying for credit, make sure your credit report is always in good shape. This will go a long way to helping you get accepted for your loan in the future. 

You are welcome to complete our free assessment form to discover if you can still qualify for a mortgage.

 

21 June 2021 | by HomeCrowd team