Someone else's id theft impacting your credit worthiness? That concept - and I know that the title of this blog – seems un-American, un-fair, and maybe even hard to believe. But it can happen, and if several new Internet startups have their way, it will start happening much more often.
When an adult applies for credit the process is pretty straight-forward. The credit granting entity goes to one or more of the three credit rating agencies and pulls a credit report on the applicant. In most cases the reports give enough information and credit history that a decision on the credit-worthiness of the applicant can be determined.
But let's say the applicant is a young person who has not established a credit history. A query to the credit reporting agencies will likely result in a "no record" response. So on what is a credit granting entity going to base a decision?
This happens frequently and will in the future become even more frequent given the mobility and maturity of today's younger generation. Here's where a friend's brush with identity theft can come into play.
Financial lending companies - those that make small loans or who finance things like automobile purchases - traditionally steer away from loaning money or financing purchases for young people with no credit histories, even those who are holding down good jobs. But now several, newly arrived on the scene, say they will make such loans to young people with no credit histories based on their social connections which these lenders say are a viable indicator of a person’s creditworthiness.
If you socialize with people who are trustworthy and who pay their bills, chances are you will do the same, as this thinking goes. Associate with deadbeats - well you get the theory.
One such lender, Lenddo, looks who your Facebook friends are. If they include someone who themselves was late paying back a loan to Lenddo, it will impact the decision on whether to lend to you. If the search reveals you are close friends with the individual it's probably bad news for you.
"It turns out humans are really good at knowing who is trustworthy and reliable in their community," Jeff Stewart, a co-founder and CEO of Lenddo told CNN's Money. "What’s new is that we’re now able to measure through massive computing power."
Obviously here's where ID theft enters the picture. Say one of an applicant's close friends has been the victim of identity theft. They may not even know it yet. But when a lender like Lenddo starts checking the credit histories of "friends," they may get back a horrible report on this close friend and make a judgment based on this essentially erroneous report.
A German company called Kreditech says that it uses up to 8,000 data points when assessing an application for a loan. Who an applicant's friends are, and what their reputations are, become factors.
The next step is for companies to be offering reports on individuals based on their social media habits when established credit histories are not available. As this spreads who your friends are becomes important as does the possibility that one of them might have a spoiled history because of ID theft.