Alternative Credit Scoring Methods are Being Used More Often
If you were told that there were only three restaurant chains that served every American, you would probably think that was crazy. Yet, there remain three credit reporting agencies (CRAs) that gather and report on everyone’s credit: Equifax, Experian and TransUnion.
However, some startup companies are trying to change how credit is scored to create a fairer credit system than the one that we currently have. Whether these new methods are reliable is a different issue.
Alternative Credit Methods
We all know people who are trustworthy and reliable who may have bad credit. In fact, bad credit can happen to very responsible people. Take, for example, someone with an unexpected medical emergency that results in thousands of dollars of medical bills. If those bills can’t be paid, the person’s credit will suffer.
That’s why some companies are looking at things other than past repayment histories to determine credit. For example, a few years ago Facebook actually patented a system whereby a lender could look at the credit scores of someone’s Facebook friends to determine their credit (that system has not actually been implemented).
New companies are looking to factors such as what a borrower majored in to assess creditworthiness. Companies are even looking at whether a borrower fills in his or her name online in all capital letters. That makes you a higher credit risk, according to one alternative credit scoring company owner, who admits to having no idea why but claims he has the statistics to prove the correlation.
One company that loans mostly to emerging credit markets without access to traditional credit even utilizes data in user’s cell phones. If contact lists have full names and phone numbers, and the names are properly capitalized, the user is thought to be more organized, and thus, a good credit risk.
Good and Bad With Alternative Methods
Advocates say that alternative methods that look beyond just past payments (which can be old, dated, or only tell part of someone’s credit story) will give more people access to credit. Additionally, alternative methods will take the power away from the three CRAs, and FICO, which scores credit, creating competition in the market.
Critics say that the new methods are unproven, and could lead to just as much abuse.
As unreliable as they often are, current scoring is based on quantitative data, or hard numbers: How much you’ve borrowed, and when and if you paid the money back. Qualitative data, such as your friends, how you fill out online forms, your job, or your degrees, may be very subjective, making it harder for you to contest a negative scoring factor.
Additionally, the traditional protections that the current system has under the Fair Credit Reporting Act (FCRA) and related laws do not apply to these alternative scoring methods. That leaves the door open for abuse.
Do you have questions about your credit or incorrect marks on your credit? Contact Jacobs Legal to speak with one of our Miami consumer rights attorneys today.