Your credit score determines everything from whether you’ll get a mortgage, but what if there’s a more accurate way of measuring your creditworthiness?
Your digital footprint—the profile you amass as you register for websites and surf the internet—can be more accurate than a credit bureau score when it comes to predicting consumer trustworthiness, according to a new study conducted by the Frankfurt School of Finance & Management.
Using more than 250,000 measurements and analyzing 270,399 purchases made to a Germany-based e-commerce company, the researchers were able to determine with, they contend, a higher rate of accuracy whether a customer would make payments on time.
Trustworthiness was particularly important to this particular company because its customers pay for products after receiving them. The company used in the study was not named, but researchers said it’s similar to U.S. furniture store Wayfair W, +5.46%
The researchers looked at the pros and cons of online behavior
Did a customer visit a website via a search engine or display advertisement? The former is seen as more valuable. Customers who use their real names in an email address are 30% less likely to default, the researchers found. It even measured the number of typing errors.
Is the customer an Apple AAPL, +3.56% device or Android owner? The difference in default rates between Apple and Android users is equivalent to the difference in default rates between a median FICO score and the 80th percentile of the FICO score, the study found.
The study compared measured the discriminatory power of credit scores, ranging from 50% (which equates to a purely random prediction) to 100% (perfect prediction). The study scored 69.6%, slightly higher than 68.3% for the traditional credit-scoring model.
China explores an alternative to the traditional credit-scoring model
Your FICO score is a three-digit number usually ranging between 300 to 850 and it’s based on metrics developed by Fair Isaac Corporation FICO, +1.32% The higher your score, the lower risk you are to lenders. It looks at factors like how you manage your credit-card payments.
The online behavioral measurements used by the German researchers in the latest study sound futuristic in comparison, but they may not be so far-fetched. The Chinese government has said it wants to give all of its 1.38 billion citizens a “social credit” score by 2020.
“The score can fluctuate based on a range of behaviors, like whether you jaywalk or buy Chinese-made goods or buy too many video games,” CNET reported. “If your score gets too low, you can be banned from buying a plane ticket, renting a house, accessing high-speed internet or getting a loan.”
New credit-scoring models could help lower-income Americans
Some 26 million Americans are “unbanked”, meaning that they don’t use a bank at all, or have no credit score. Black, Hispanic, and low-income consumers are more likely to not have enough history to produce a credit score, according to the Consumer Financial Protection Bureau.
A new form of determining whether someone is trustworthy or can make payments on time could be beneficial to lower income Americans or victims of identity theft, said Nick Clements, the co-founder of personal finance company MagnifyMoney, who previously worked in the credit industry.
But he worries about unintended consequences. “I get nervous about these kinds of measures,” he said. “When you start to use these kinds of indicators —you must own an iPhone, you must have a LinkedIn account, you must never swear—you could be creating a modern form of redlining.”