It is hard to believe that the FICO credit scoring model has only been used for over 30 years. Banks, private lenders, and other financial institutions have depended on this model to determine the creditworthiness of loan applicants. It evaluates an applicant’s job status and critical aspects of their credit history, such as the number of credit accounts and the number of on-time and late payments on each account.
Unfortunately, this standard credit scoring model is not 100% fair to everyone. For example, younger people or those with little to no credit history will be discriminated against by the model because they don’t have a history of making payments on a credit card or loan account. Even if they are financially responsible people by paying their bills on time, the standard model will not take that into consideration.
How AI May Improve the Future Credit Scoring Model
Artificial intelligence may be the key to improving the standard credit scoring model to assess more aspects of an applicant’s past financial behavior. It should not be surprising to think that AI could change the financial industry this way, considering that AI is now changing almost every other industry.
So, what can AI do to help improve the credit-scoring decisions of lenders and financial institutions? Let’s explore some of the things an AI-based scoring system could look at that the traditional scoring model overlooks:
Bank Transaction Records
Imagine a credit scoring system that evaluates your spending patterns and tracks the deposits, withdrawals, and bill payments made to and from your bank account. That is what an AI credit scoring system will have the power to do in the future. It will evaluate the records of all your bank account transactions from the past year or even the past five years to gain deeper insights into your level of financial responsibility.
This AI-powered credit scoring system could be a game-changer for young working people without a traditional credit history. Instead of being judged by the number of credit accounts on their record, their creditworthiness will be judged by their ordinary financial behaviors and habits.
It is also great for lenders, too. After all, some people with traditional credit histories might still have bad spending habits that wouldn’t be detected on a standard scoring system. However, an AI-based scoring system would detect these habits and help lenders assess an applicant’s creditworthiness more accurately.
Work Experience and Income History
Lenders usually consider a credit applicant’s current job status and income amount but not their past work experience and income history. Anyone who works as a freelancer or gig worker knows how frustrating it can be to apply for credit without having a so-called “regular job.” Even if you earn a high income as a freelancer, you don’t have any paystubs or employers to provide to the lender as proof of your income stability. Because of this, they will likely turn down your credit application.
The AI-driven credit scoring system will change this for the better. It will assess your freelance income and employment history to better judge your income stability and creditworthiness. So, even if you are unemployed or rely on freelance income to survive, your future credit scores will factor in past employment and current freelancing work when applying for credit. Since we already live in the gig economy, that will help freelancers tremendously.
Online Behaviors and Shopping Habits
Some of you may or may not like this one, but future AI-based credit scoring systems may use it to judge your creditworthiness. Future AI scoring models will contain algorithms that track online behavioral patterns and shopping habits, such as your number of current and past online subscriptions and purchases. In addition, an AI scoring system may even assess your online activities and comments on social media platforms and other professional networking sites.
For instance, the AI could scan through your social media posts to find comments about your financial struggles and stress over making debt payments. It could even scan the information you have entered on online credit applications and other online registration forms to determine the consistency and accuracy of the information provided to lenders. If there are any inconsistencies found in the past information you’ve entered online, it could work against you when applying for credit.
Rent and Utility Payments
It is a shame that paying your rent and utility bills on time does not factor into the current credit scoring model. Of course, if you are late with your rent or utility payments, it will be reported to the three credit bureaus and then hurt your credit score. But when you pay them on time, your landlord and utility companies don’t report anything. Is that fair?
The future AI-based credit scoring system might change this forever. Its algorithms will track all your rent and utility payments to signify on your credit report that you have been a good tenant and utility customer. Younger people with limited credit histories and living independently for the first time will benefit greatly.
Is An AI-Powered Credit Scoring System Better or Worse?
An AI-powered credit scoring system raises privacy concerns because it dives deeper into your online activities and shopping habits. On the other hand, it can also be a lifesaver for financially responsible people with freelance income or limited credit account histories because the AI looks at financial transactions and all sources of income to judge their creditworthiness.
Overall, an AI-powered credit scoring system will be better than today’s standard system because it is more thorough and accurate when evaluating people’s financial stability. It will still factor in previous credit accounts and the number of on-time payments made to those accounts. Only this time, it will include additional factors to calculate credit scores and determine people’s creditworthiness. That will help lenders conduct better credit assessments and allow deserving applicants to receive credit regardless of their credit history and income type.
