Why traditional credit scores still matter

Researchers and startups say all kinds of weird data can predict your creditworthiness. What kind of smartphone you have, who your friends are and how you answer survey questions may foretell how likely you are to pay back a loan.

Don’t expect this alternative data to displace the three-digit number most lenders use, however. Credit scores still matter — a lot.

Lenders use credit scores to decide whether you get loans and credit cards, plus the rates you pay. Scores are also used to determine which apartments you can rent, which cell phone plans you can get and, in most states, how much you pay for auto and homeowners insurance.

The central problem with credit scores is that they can’t be generated unless people actively use credit accounts. Millions of people don’t, but they still may be creditworthy. Alternative data is being used to sniff them out.

What may predict your risk of default

Some U.S. lenders, for example, factor in how often people change addresses, how they pay noncredit bills such as rent or cell phone plans and how they handle their bank accounts. FICO, the leading credit scoring company, has found that people who have savings, maintain higher balances in their checking accounts and don’t overdraft may be good credit risks. The company has created a new “opt in” score that would allow lenders, with consumers’ permission, to factor in bank account behavior when evaluating loan applications.

In Russia, applicants can get loans based on answers to “psychometric” surveys that evaluate their verbal and arithmetical skills. Meanwhile, a study of a German e-commerce company’s transactions found people’s “digital footprints” — whether they use iPhones, have numbers in their email addresses or shop at night — can predict their risk of default. (If you’re curious, iPhone users

Nerd Wallet