Credit Info

Can Your Social Media Activity Lower Your Credit Score?

Over the last 10 days the Internet has been abuzz with stories of lenders using social media data to determine credit scores.

All of a sudden our usage of reputable outlets like Facebook, Twitter and LinkedIn has been thrust into the discussion, unnecessarily.

Your Tweets, Friends, and connections are not being used by U.S lenders to determine your risk and are not influencing your credit scores.

Birds of a Feather

The theory behind the use of social media data as a risk evaluation tool can best be described as “birds of a feather flock together.”

The argument made by some companies is that people who pay their bills on time tend to connect with other people who pay their bills on time.

Conversely, they argue that people who miss payments tend to connect with others who miss payments.

This “birds of a feather” notion doesn’t seem like a solid hypothesis.

I’m sure all of us know people who pay their bills on time and also people who mismanage their credit. And we’re probably connected to each type via our social networking.

Besides, how many people tweet that they’ve just missed a payment on their car loan?

The Requirements for Credit Scoring Models

“Empirically derived and statistically and demonstrably sound.”  Those are the requirements for any scoring model to be used by lenders in the United States thanks to the Equal Credit Opportunity Act.

What all of that means, in English, is that a scoring system used by lenders has to have been built using an empirical process and that it has to actually work.

U.S lenders cannot use what’s referred as an “expert model.” An expert model is built using non-scientific methods based on the developer’s best guesses or assumptions.

So, for example, just because we may strongly believe late payments are predictive of future credit risk it still must be proven to be predictive in order for it to be considered by a credit scoring system.

Can Social Media Play Into the Equation?

Let’s just say, for argument’s sake, that social media activity was actually predictive of credit risk and COULD be used as a basis for your credit scores.

At that point scoring models would scour the web looking for your activity and then gin a score that would be used by lenders to determine approvals, denials and interest rates.

Those wouldn’t be credit scores, however. Credit scores only consider information on your credit reports and your tweets and friend list do not appear on your credit reports.

The scores based on social media data would have to be called something else, like social media credit risk scores, or something similar.

The very small list of lenders that claim to underwrite loans based on social media data either do not do business in the United States or use traditional credit scores, additionally, as a basis for their decision.

There is no U.S lender that’s granting or denying credit solely based on social media information, yet.

As with most things related to the evaluation of credit risk, there’s always an attempt to manipulate and control the system.

For credit reports it’s credit repair (attempting to get accurate but negative information removed from your credit report) and piggybacking (paying someone to be added as an authorized user on their credit card).

With credit report data it’s difficult to game the system because we don’t really control what goes on our credit reports.

The same cannot be said for social media information.

We are in complete control over all of our connections in the social media world. We can choose how often we post messages, what we say, and with whom we interact.

Point being, if someday social media data is used for measuring credit risk, then we would be able to easily game the system because of our complete control over the system.
