Big Data is New Tool Used in Consumer Lending
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Two new start-ups have recently opened their doors to serve consumers with limited or no credit files. These consumers find it difficult, if not impossible, to borrow from traditional lenders because the credit bureaus do not have enough information to determine their level of risk.
Have you had the same cell phone number a long time? That probably indicates you are a good credit risk. Use all capital letters to fill out a form? That indicates you are less likely to repay a loan.
Earnest, Affirm and numerous other startups use computer programs to create a tapestry of a consumer’s online and offline behavior. The data points can include things as varied as social network connections and education history to the amount of money in a consumer’s retirement account. This allows the companies to go beyond what normal credit bureaus analyze and seek out consumers who are good credit risks but might be undiscovered by traditional methods.
Many experts expect this analysis of “Big Data” to be the future of analyzing credit risk. They may eventually replace the use of the standard credit bureaus and FICO scores. While the lenders have mostly restricted their efforts to writing small personal loans, some have recently announced they will enter the student loan and mortgage markets.