Not paying an EMI on time or using a credit card too much are no longer the only ways a CIBIL score can be affected. Credit assessment is becoming data-driven with information being collected from various sources like social media and digital transactions to determine the credit worthiness of an individual. A lot of financial technology startups are using their own data analytics as credit assessment tools.
When calculating the CIBIL score of an individual using traditional means, aspects like payment record, credit utilization, credit mix, etc are used to assess the creditworthiness of an individual. This data is used to analyze if an individual can be trusted or not to repay his dues on time.
So finding a parallel in the digital world, social media interaction of an individual on Twitter, Facebook, LinkedIn are analyzed to reach the same conclusion - can a person be trusted to repay his dues on time? Well, this is what a traditional credit score is about, trying to predict with the help of a three digit number if a person is likely to default on his repayment or not in the future based on his past transactions and financial habits.
In more credit dependant economies also, rating agencies are looking for alternative ways to predict the financial creditworthiness of an individual. In these economies, credit score rating models already include utility bill payments, mobile bill payments, and rent payment history when calculating the credit score. In the world of social media interaction, the champions of this alternative credit rating model believe (and rightly so) that a lot of information about an individual is easily available online due to this huge social media explosion. If this available data is used in the right way then it could pave the way to get a credit score that goes beyond EMIs and credit card dues.
Data from professional networks can be accessed to find about a person's employment history (how long has he/she been employed, where is he/she employed, what is the job profile, how stable is the job, how frequently does the person switch jobs and so on), an individual's network of friends and acquaintances can also be scrutinized to find about his reputation, who are in his circle of friends, people with credible financial history or those who default. The social demographics like age, income group, and those he or she interacts with, socially and professionally, along with academic background, can all be crunched to reach an estimate about the likelihood of an individual being a responsible borrower or not.
Credit scoring companies in the US and China are already experimenting with data from social media profiles. Counting how many times someone says “wasted” in their Facebook status can help to predict whether they will repay their debts on time, according to a trial by US credit analyst FICO.
While an "open score" or an "alternative scoring model" is being discussed enthusiastically and a lot of agencies including CIBIL are working on it; there are some legal and operational issues that need ironing out. However this is a win-win situation for both lenders and borrowers as it will benefit both the parties:
Bigger Market for Lenders: The fast growing population of internet and social media users offers a huge opportunity to lenders; there is a huge untapped market just waiting out there. Those who could not be considered earlier for lending due to lack of traditional CIBIL scores can now be considered for potential lending based on the alternative score.
Better Assessment of an Applicant: Once this is in place it is not necessary that this model of credit scoring be used only as an alternative. It could aid the present model of rating and provide better insights into a customer.
Aids Financial Inclusion: Financial inclusion which is high on the government agenda could become a reality with this. Those fresh out of college or who are not within the ambit of traditional scoring model can benefit from this and borrow based on the alternative score. Currently a person may be denied a loan because he had no loan in the past (ironical but true). With this is place it will change as the social media score could be used to assess the applicant.
With the of help of all the information on hand, lenders can provide more personalized and better services to their customers and customers on the other hand can have access to more choices.