Dramatically quitting your job via viral video might seem appealing after your boss starts screaming at you--again--but for the sake of your credit score, it's probably not a good idea. According to a recent report from the Wall Street Journal, lending companies and Fair Isaac (FICO) might soon start using social media data to help determine your credit score.
Your credit score is used by lenders to assess your level of risk, which in turn affects your interest rate. Just like with your grades in school--and pretty much everything except golf--the higher the score, the better.
What Contributes to Your Credit Score?
"There are five things that go into your score," says certified financial planner and Workable Wealth founder Mary Beth Storjohann:
- How you pay your bills accounts for 35 percent.
- Amount of money you owe and the amount of available credit accounts for 30 percent.
- Length of credit history is 15 percent.
- Mix of credit accounts for 10 percent. This involves both revolving credit, such as credit cards, and installment credit, such as mortgages and car loans.
- New credit applications is 10 percent.
Let's face it: People sometimes lie about their financial situations. Someone might claim to be gainfully employed, then turn around and post a Facebook (FB) status about quitting his job. Or he might tweet that his boss is a dirtbag and promptly get a pink slip. Lenders can use social media profiles to verify the legitimacy of applications, among other things.
Remember when your parents said hanging out with the wrong crowd would reflect poorly on your reputation? Well, lenders could think the same and use social media data to examine the company you keep, at least on the Internet. The caliber of your Facebook friends can play a factor in how attractive you are to lenders.
Privacy Isn't the Only Concern About Mining Social Media Data
Invasion of privacy might be your first beef with companies examining your social media data to determine your trustworthiness, but what about the possibility of inaccuracies?
Storjohann, who quit her full-time job to launch her own financial-planning business, is concerned that FICO and other companies might jump to conclusions. For instance, if a lender assumes she no longer has a steady income, how might that affect her credit score?
Lenders mining Facebook and other social media sites might not realize that Storjohann, for example, is part of a two-income household with a savings cushion built up to finance her business.
Could Social Media Data Mining Help You Secure a Loan?
If you come off as squeaky clean with a network of responsible friends, it's possible that social media can help you secure a loan. There are also other options for bolstering your appeal to lenders.
It may be rare, but there are recent grads who made it through college without debt, paid for a car with cash, and only had one--or no-- credit cards.
The credit report and score system focuses largely on our debt, so a lack of loans and credit cards could actually result in little or no credit. Companies such as eCredable help solve this problem by offering an alternative to the traditional FICO credit score.
ECredable allows people to use bills not traditionally reported to credit bureaus in order to establish their trustworthiness.ECredable users can verify their bill payments to utility companies, cellphone providers, insurance companies and others service providers in order to create "alternative credit," as the company calls it.
Under the Equal Credit Opportunity Act, lenders asking for a credit check are required to accept alternative credit accounts.
The Federal Housing Administration, Fannie Mae and Freddie Mac created a tiered system for the verification and use of alternative credit, which eCredable uses as the basis of their own process.
Protect Your Credit Score
Whether or not social media data becomes commonly used to determine our credit scores, it's important to be proactive with our credit reports. Your credit report is used to create a credit score, so you should be diligent about checking at least once a year for inaccuracies or fraud in your report. You can check free through annualcreditreport.com, which offers copies of your reports from Experian, Equifax (EFX) and TransUnion. You can even space out when you want to see the reports so you can check for free three times a year.
Unless you plan to never rent an apartment or get a mortgage--and you pay for all your purchases in cash--your credit report and credit score matter. You should be vigilant about protecting them.
Erin Lowry writes for DailyFinance on issues relating to millennials, money and personal finance. She's also the blogger behind Broke Millennial, where her sarcastic sense of humor entertains and educates her peers. Popular posts include: