Financial advisers and gurus have always emphasized the importance of credit scores — and most people today have taken this advice to heart, trying to be more proactive in checking their credit scores. In fact, a 2018 survey by the Consumer Federation of America notes that an increasing number of people are trying to educate themselves on how credit scores work, with 57% of respondents saying that they have done their part by checking their credit scores in the past year.
Simply put, a credit score is a number that represents an individual’s probability of creditworthiness. In today’s world, having a credit score is necessary as it plays a huge role in your likelihood of being approved for credit products and services — such as credit cards and mortgages. To gain access to a wide variety of financial products and achieve more in life despite having limited savings, you need to build your creditworthiness and show lenders that you’re responsible enough to be trusted with their money.
While many would argue that credit scores are necessary for lenders to protect themselves from delinquent borrowers, it also creates a number of issues that affect everyone. For starters, building a good credit score isn’t as simple as one may think. The secret formula for reaching high credit scores is closely guarded by credit bureaus and lenders. This is because the algorithm used by credit bureaus is inherently biased, despite what they say. In fact, the BBC suggests that, while society tends to assume that computers and algorithms are impartial tools, the historic data they process and the programmers who create them are themselves biased. The result is, it can unintentionally discriminate against various groups of people.
Aside from that, our previous post ‘Loans Bad Credit Online – 5 Ways a Bad Credit Score Can Affect You’ outlines how your rental applications, loan applications, employment opportunities, cell phone contracts, and insurance premiums can all be negatively affected if your credit score dips.
Thankfully, disruptive innovations such as fintech are poised to shake up the credit score industry and how it affects individuals. One such fintech company that is changing how we approach credit scores is Petal Card. Through Petal Card’s Petal 1, people with complicated histories can get a no-annual-fee Visa credit card that is optimized for responsible credit-building. To figure out if an applicant is eligible for the Petal 1, Petal Card analyzes an individual’s banking and credit history — allowing them to create an unbiased assessment of an individual’s creditworthiness and provide more people with access to credit with better perks and terms. In addition, Petal 1 is paired with the Petal mobile app, which gives users access to budgeting tools, credit score tracking, and payment management tools.
Another fintech company that is challenging the credit score game is Zest AI, formerly ZestFinance. With their goal to make fair and transparent credit available to everyone, Zest AI has created a machine learning platform that allows lenders to analyze huge amounts of non-traditional credit data to help improve approval rates — particularly for thin-file borrowers like millennials and those affected by algorithm bias.
The cracks in the credit system are now being exposed as more people do their due diligence and enlighten themselves on how credit scores work. Consumers are now aware that the current credit score system only empowers a selective group of people, and those who are affected by credit inequality are demanding a more fair and balanced assessment. Thankfully, we now have fintech companies that can help reshape our financial expectations. And eventually, we’ll see more inclusive, fair, and personalized financial products available for all.