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The credit scores of tomorrow

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Lenders could soon be using data from your browsing, search and purchase history — your “digital footprint” — to create a more accurate credit score, according to International Monetary Fund (IMF) researchers.

The working paper shows that combining your credit score and your digital footprint “further improves loan default predictions.”

And how exactly would this data be collected and used as part of your credit report? Survey says: Artificial intelligence (AI) and machine learning.

The IMF isn’t the only group to ponder such futuristic notions.

A 2018 study from the Frankfurt School of Finance & Management also looked at lenders using your personal online data in tandem with traditional data from credit bureaus. So, what does your online behavior really say about you?

Their findings showed “the digital footprint allows some unscorable customers to gain access to credit while customers with a low-to-medium credit score can either gain or lose access to credit depending on their digital footprint.”

In theory, a lender would be able to see a credit report that uses an algorithm to show a mix of your online shopping and browsing habits as well as the traditional financial data like your income and payment history.

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Is this good news for consumers?

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While some people may balk at the idea of lenders having access to their personal browsing data, the IMF research points to some advantages to consider. The researchers believe this approach will help borrowers who’ve been denied by traditional financial institutions, especially during tough times.

Take the COVID-19 pandemic: Though mortgage rates kept hitting new lows, lenders became much pickier when doling out those record-low rates. Instead of focusing on whether you were late on one loan payment during a recession, your purchase and browsing history could tell banks you're trustworthy even if your traditional credit score has taken some dings.

These changes to how credit scores are calculated could be very helpful if you have had trouble getting approved for credit in the past. The Frankfurt study notes that their findings “provide suggestive evidence that digital footprints can have the potential to boost financial inclusion for the two billion adults worldwide that lack access to credit.”

What are the risks?

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Before you start giving yourself a digital makeover, like filling out your LinkedIn profile to show your professional or academic accomplishments, keep in mind these changes to how your credit score is calculated are still speculative at this point.

Your Orwellian objections may have some merit. What about privacy and security concerns? The IMF research acknowledges there would be an “efficiency-privacy trade-off.”

“The increasing use of private data for financial services also raises a myriad of consumer protection and privacy issues that require the government to set standards for data collection and use,” the working paper says.

The paper points to fair lending rules in the U.S. that prohibit using gender or race information for lending decisions. So how much of your digital footprint is fair game when it comes to evaluating what kind of borrower you’ll be? And how will your information be kept safe from data breaches?

The researchers say new regulations will need to be set by governments so that Big Tech faces the same data privacy requirements as banks do. Big Tech innovations move at such a fast pace, it may take a while for governments to catch up with the necessary policy. When it comes to regulation, it is a slow-moving process.

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Building that three-digit number

CREDIT SCORE  (Businessman Checking Credit Score Online and Financial payment Rating Budget Money)
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A solid credit score will help you qualify for a mortgage, personal loan or a credit card with lower interest rates. Even landlords may peek at your score before accepting your application.

The three major credit bureaus — Experian, Equifax and TransUnion — collect your financial information to tabulate your FICO score, using categories like your payment history and credit utilization.

Until the implications of collecting and using personal data for financial services has been studied further and there is a clearer picture for consumers, you’ll need to improve your credit score the old fashioned way. Here are 4 ways to give your score a boost:

1. Check your score regularly

Keeping tabs on your score is the most effective way to make sure your credit is in good shape. There are online services that let you see your score for free, and email you any time your score changes.

2. Consolidate your debt

Your payment history is the single biggest contributor to your credit score, so you don’t want to fall behind. If you’re struggling with a few high-interest debts, you should consider a debt consolidation loan. You can take out a new low-interest loan and use it to pay off your high-interest debt. Then you’re left with just one, more manageable, monthly bill.

3. Add to your credit mix

A secured credit card can help you build your credit history, especially if your score took a nosedive recently and you can’t get approved for the real thing. These cards are low-limit and require a deposit; if you compare offers, you can find one with attractive terms.

4. Watch out for fraud

Scammers are out in full force, targeting Americans already struggling through the recession. Identity theft and credit fraud can leave your credit score in the tank. Stay vigilant and check your credit report regularly for unusual or suspicious activity.


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Ethan Rotberg Former Reporter

Ethan Rotberg was formerly a staff reporter at MoneyWise. His background includes nearly 15 years as a writer, editor, designer and communications professional. He loves storytelling, from feature writing to narrative podcasts. His work has appeared in the Toronto Star, CPA Canada and Metro, among others.


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