Everyone who has ever applied for a loan knows about credit scores. The concept is relatively simple. A combination of factors is measured, with each contributing a percentage to an overall score. Whatever that final score is can automatically trigger an approval or denial on your financial applications. Some institutions can also use credit scores to determine the interest rate customers receive on their loans.
Different credit unions have different ways of calculating credit scores in Australia, but most use information similar to what the well-known FICO score relies on as their basic formula. As a general formula, here is how a FICO score is calculated:
payment history (35%)
amounts owed (30%)
length of credit history (15%)
new credit (10%)
credit mix (10%)
Banks and other lending institutions will combine this base score with other indicators of your creditworthiness, such as job stability, recent payment history, and debt-to-income ratio. But even people with fantastic credit scores can default on their loans. This has led to lending institutions like banks and mortgage companies searching for other ways to evaluate a person's creditworthiness.
The Rise of Social Media Credits
Until now, the uncertainty around anti-discrimination laws has lending entities from using more alternative data to gauge the financial trustworthiness of a loan applicant. But when increasing online data on customers being made available — it was only a matter of time before they found a way to use it.
Social credit is by no means a new concept. The idea has been around since at least 2014. And in 2019, the US government officially endorsed the use of alternative information to evaluate consumers' creditworthiness.
Social Credit Indicators
There is no denying the importance of social media when it comes to building a brand. Companies can often succeed or fail based purely on their online presence. But with social media comes an entirely new type of business professional known as an influencer. These are more than just people with high follower counts, though.
They are individuals or businesses who can drive action through their social media posts. Action can be defined as any number that includes comments, likes, shares, and direct sales or conversions driven by an influencer's post. The influencer marketing industry is set to grow to approximately $13.8 billion in 2021, and established Instagram influencers can earn as much as $700,000 through sponsored content deals.
So, a high follower count could indicate your ability to earn an income in the future and continue your growth and possibly repay your loan sooner.
The Future of Social Credits
Opening up the ability to use alternative data sources to evaluate someone's creditworthiness means that about 45 million consumers who do not have enough credit history of generating reliable credit scores under the current system will now qualify for loans.
It could also give a more accurate scope of a customer. Maybe the customer has recently just started up a business after leaving their employment in the same field for several years, and often they will not meet minimum trading for loans. Seeing their LinkedIn profile allows lending companies to establish past histories of trade that bolster his application.
It will also create more touchstones for investigating data provided for applications, as Credit-lending institutions can cross-check emails, phone numbers, and customers' physical locations. This will help to slow down fraud and impersonation, things that picked up with remote applications thanks to COVID-19.
It also means institutions do not have to rely on references, as often a bank will call a supervisor once, and if they are not at their desk to answer the call, your loan may not process further. However, if they can see your employer endorsed you on LinkedIn under the company's official profile, it could be weighed as a positive in the application.
Many people in positions of influence and power need to empower the middle class, help eliminate or squash the poverty gap, and give everyone an opportunity for a better life. In addition, how would this be achievable if people don't have any means of improving their lives by either beginning a business, taking a loan to invest in their infrastructure or finding funds to further their education? Social scores could offer a way forward for this class of people.
Here at GRENKE, we still value the personal touch more than anything
No matter what industry you‘re in, orhow many followers you have, we can help. Get in touch with our friendly team today to explore our tailored finance options.