During the footloose and fancy-free early days of social media, it was quite common for people to become online “friends” with really just about anyone who asked: as long as it wasn’t Hitler or NAMBLA, why not use social media to stay in touch with some random person you just ran into on the subway?
Well, it turns out that this was probably not such a great idea, for any number of reasons. Here’s a new one (new to me at least): it turns out your social media “friends” could have a negative impact on your credit score, as a number of new companies are springing up dedicated to mining social media data to assess your creditworthiness. And while that might be good news if you associate with lots of responsible, well-employed punctual bill-payers online, if you are friends with a bunch of derelicts you may be in trouble.
Of course, there’s a lot to be said for the idea. One new start-up, Lenddo, serves the “emerging middle class,” meaning people who might not be able to secure a loan using the traditional vetting process, since they are “unbanked” and don’t have much credit history at all. Lenddo is positioning itself on what I will call the positive side (meaning, helping deserving people get loans, as opposed to sniffing out bad borrowers). Currently the company is making loans in Colombia and the Philippines, and is looking to expand elsewhere.
Another company, Kreditech, based in Hamburg, Germany, is also focused on the “unbanked” or “underbanked” market, especially in the developing world. According to Kreditech, the company uses “Big Data” and complex algorithms to analyze 8,000 online data points about every applicant, including social media information.
Lenddo and Kreditech both resemble Wonga, a British service that offers payday loans after assessing creditworthiness based on social media data, among other sources. Although Wonga is popular for a reason -- you can get a loan when no one else will give it to you -- it is attracting scrutiny in the press and from regulators because of what some call excessively high interest rates, in some cases at an APR of 5,853%.
Beyond the temptation to take advantage of people with bad credit (a practice which existed long before social media) I see a number of potential problems with drawing on social media data for credit ratings -- especially if these kind of techniques were adopted by mainstream banks and credit card issuers. What happens if everyone suddenly starts worrying about how their group of online friends impacts their credit ratings? In addition to my concerns in the first two paragraphs, would people start pruning their social networks and ditching real, genuine friends because they feel they pose a threat to their credit rating? I feel like most people have that one friend -- the hapless guy or girl who has bad luck with jobs, owes way too much on their credit cards, and has probably, at some point, crashed on your couch. Sure, they might not be the most responsible individual you ever met, but they’re still your friend. Is it now a liability to even know this person, or acknowledge that you know them on social media?