With larger amounts of data and greater access to more sophisticated modeling programs, the way creditworthiness is checked and a credit score is created is also changing. According to a study by the University of Georgia, particularly the case for those people who do not have a strong credit rating. This means that people who are more susceptible to questionable lending are more likely to be affected.

Legislators must make improvements

The problem with this system, according to the study authors, is that these alternative reviews, which come from a wide variety of sources such as social media, can be like a black box. According to senior researcher Lindsay Sain Jones, it is therefore necessary to take a closer look at the US credit scoring system. Jones and colleague Janine Hiller argue that Congress should enact new regulations to prevent alternative credit scoring services from misusing consumer data in the credit reporting system.

Companies developing alternative credit scoring services, however, argue that their products provide underserved populations with access to these crucial services. However, Jones says the opaque nature of their operations makes them ripe for abusive procurement practices. With new products, borrowers do not know what information is used to calculate the score. Therefore, you cannot object to incorrect information.

Questionable practices spread

Some credit scoring companies offer consumers a credit boost in exchange for access to their past expenses on electricity and rent. But Jones says there are few guidelines that regulate what companies can do with this information and how long they can keep it. “The loan was rejected. But he is needed. So people give away all the data just to improve the score. This may or may not improve your chances of getting the loan.”

Other lenders collect data from public documents or social media to create a profile without the customer's knowledge. “There are companies that specialize in obtaining data from online sources, such as profiles on LinkedIn and Facebook. This data is then fed into the credit model.” This can include order history, where and when a person applied for a loan, information about the period of study and employment, as well as activities on social media.

In this case, those affected do not know by what criteria they are being judged and cannot object to errors. According to Jones, there is no possibility of objection if the lender does not like how often trips are taken or clothes are bought. Researchers are also concerned that many of the lifestyle data points that lenders correlate with credit scores are related to race, gender, age, socioeconomic status, zip code or where a person studied.

Conclusion

The US credit scoring system is undergoing a transformation. Larger amounts of data and stronger modeling programs allow credit scoring providers to develop completely new forms of assessing creditworthiness. Data from unusual sources, such as social media, is also used. Customers in need are particularly affected by this, as they can be rejected more easily. A check is often not possible for the affected customers. The exact algorithms remain opaque. Researchers are calling for careful scrutiny and the setting of transparent standards. The providers, on the other hand, argue that the larger database would give underserved population groups better access to credit.

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