Getting credit or a mortgage declined is a big concern for many of us. In fact, most of us will need to use credit at some point in our lives, so it’s a big deal when we are declined. That’s why credit scores are important – to improve our chances of gaining access to credit and enabling us to navigate quickly through life’s twists and turns.
If bad credit scores are so impactful on our everyday wellbeing, it is imperative that the systems used to calculate these scores are not only accessible but unbiased, too.
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Why Credit is Critical in our Society
Borrowing remains a huge part of our current economy – businesses, governments and individuals all gain from being able to borrow considerable sums of money.
Credit is vital so that our society can grow, allowing companies access to the tools they need to produce the items we buy. Without it, there would be little innovation in the world, and most businesses wouldn’t have an opportunity to expand, or even get off the ground. A company business that couldn’t borrow might be unable to buy machines and raw goods or pay the employees what they need to make products.
The same goes for individuals, too. For example, a young woman may not have the capital to buy a car in one lump sum but needs a car to be able to drive to work to earn money to feed her family and pay for their home. Getting a loan allows that individual and their family to grow and build wealth, rather than being caught in a catch-22 or turning to high-cost sources of cash like pawn shops.
“Loans are a necessary part of life for many,” says Katie Ross, education and development manager for American Consumer Credit Counselling.
Traditional Scoring Systems are Biased
If access to credit products gives the opportunity to grow, it is crucial then, that everyone has fair access. Yet, many of the current credit scoring systems in place suffer from bias.
For example, traditional credit lenders use scores that are biased negatively towards younger people because scores are based on repayment history. Younger members of society won’t have had a chance to build up their records, even though they may be financially responsible, which will go against them when applying for a loan.
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Immigrants, too, suffer from traditional rules – any new migrant to the country needs to start their credit score from scratch, losing any positive history they might have built up in their former home country.
While fair access to credit is necessary, it is also crucial to only lend to the right people. If not, then it leads to individuals getting into bad debt situations, or poor rates of savings at banks.
When credit is not done in the right way, then we exclude people because of their demographic or personal background or enable individuals to get into unfortunate circumstances, none of which should be the case.
The Case for Alternative Credit Scoring
Innovative alternative scoring methods aim to correct the biases made by major credit bureaus. They are more transparent and use more widely available data, like transactional data, making the overall system fairer. Alternative credit scoring has also been shown to more accurately predict a person’s financial capability, leading to less risk for both lenders and consumers.
It’s not just a case of using more data for credit scoring models, either; just because you add more data doesn’t mean your model is less biased. It is vital that we avoid making the same mistakes as previous models, and ensure biases are removed. One way to do this is through the use of SHAP values, to justify a model’s solution and provide a clear explanation of how it was reached.
We all Need Credit
Access to credit is a vital cornerstone of our financial world. We all need it – society, businesses and individuals.
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That’s why alternative credit scoring is so important. It gives an opportunity to people who may not have had access to credit before which is a huge step in the fight for financial inclusion. And it can avoid the mistakes of traditional credit scoring, by using tools such as SHAP values.
A fairer credit scoring system allows businesses and individuals to grow and prosper, which in turn benefits all of society – more equitable credit scores through alternative credit scoring is a powerful force for social good.