Scott Aldworth: Credit Scores for Micro-Loans from Phone Use Patterns

Link to Scott Aldworth’s LinkedIn homepage

I am pleased to host another student guest post, this time by Scott Aldworth. This is the 19th student guest post this semester. You can see all the student guest posts from my “Monetary and Financial Theory” class at this link.

Silicon Valley startups are making the approval process and distribution of micro-loans easier to individuals in developing countries, and will help these emerging economies grow

Some Silicon Valley-back startups are revolutionizing how creditworthiness is determined in the developing world, looking at new metrics that are different from the traditional measures of credit. Traditional methods of measuring credit are an individuals three credit ratings determined by the three main credit rating bureaus: TransUnion, FICO, and Equifax. The new method, however, uses different data from phone usage.

A simple app that can take all sorts of data - everything from texts, emails, GPS coordinates, social-media posts, to retail receipts - hold correlations with creditworthiness. This new strategy reduces the cost of pulling up a credit score for an individual in a developed country. Even more obscure data, like how often an individual charges their phone or how many incoming texts they receive have patterns that can give signals about their creditworthiness.

The loans are small and are not given by traditional banks. The average loan is only about $30, but these small loans, also known as micro-loans, can give a taxi driver enough money for gas or a fruit stand owner enough money for fresh produce.

Kiva, an organization that lends out micro-loans in emerging economies, gives out loans similar to these at as little at $25. Their deposits also come from generous contributions from the organization’s chapters and individual donors which are then paid back once the loanee can pay back the loan. These micro-loans allow poor individuals in emerging economies to get the money they need to pay for expensive upfront costs of running their business without a credit score that is needed to get a loan from a bank.