Social Credit Score

Your creditworthiness amongst those that you have a relationship with.  The willingness of your friends, family, and acquaintances to lend you money.  An alternate way to think about your credit score that does not reduce you to a three digit number.

Today’s banking industry would have us believe that you are defined by a three digit number … the infamous credit score.  The powers that be have assigned each and every one of us a number that has the power to control much of our destiny.  But do we have to live in a word where we are defined in this way?  Does the system that bestows our credit scores upon us hold the only set of keys to borrowing money?  Increasingly the answer to this question is … NO!  More and more, individuals nationwide are opting out of the system that in the past 5 years (and arguably much longer) has not given them a fair shot at the nation’s wealth.  They are circumventing the system through crowd-sourced lending, local investing, land contracts or lease-options to purchase real estate, bartering, and cash transactions.  The “relationship model”, which has been largely replaced by FICO scores in most banking transactions, is making a comeback.  Although the FICO score (or other similarly calculated credit score) still holds a great deal of weight, for an ever-increasing number of people, it is their “social credit score” that really matters.

Picture with me for a minute an office of 10 people.  Every day for lunch, those 10 people go out either on their own or in groups to get lunch at a restaurant and every day, these 10 people lend and borrow money from eachother.  One day someone forgets cash, the next someone needs to stay back and asks his colleagues to pick something up.  If you’re in that situation, it doesn’t take long to figure out who will pay you back and who will not.  This is social credit.  Eventually those with low social credit scores, in other words those that don’t pay back what they owe or who never offer to buy for others, will have a smaller pool of people willing to buy lunch for them.

Now picture this happening on a larger scale, where in order to borrow money you don’t have to hope and pray that that credit card payment you missed 4 years ago will bring you down to 660 causing you to once again get denied by Bank of America for a mortgage.  Instead, you have to develop some sort of relationship with another individual and convince them that you are worthy to borrow their money.

Crowd Sourcing or Peer-to-Peer Lending

Crowd-sourced lending is a prime example of a marketplace where one’s social credit score matters.  Sure, to get approved at The Lending Club or Prosper.com you will have your regular credit score checked, but that is only part of what qualifies you for a loan.  The other part is the potential borrower’s story or their reason for wanting to borrow money.  The story, although often only a few lines of text, begins a relationship between the borrower and lender.  Here are a few examples of people’s stories from Proper.com …

1.  Purpose of loan:  Pay off four loans/credit cards  |  My financial situation:  I can easily make the payment and will probably pay it off early.

2.  Purpose of loan: To pay off existing high-interest debt and began saving for my son’s              college education.  |  My financial situation: I am a good candidate for this loan because I am an honest, hard-working professional educator who is tenured and never makes late payments to creditors.

3.  Purpose of loan: Rental property purchase.  This loan will be used to complete a purchase of a rental property.  |  My financial situation: Good.  I am a good candidate for this loan because I have my regular income and I also have rental income coming in I have almost completely paid my credit cards and I have had a loan with prosper before and paid it off early.

Unlike going to a bank that is only concerned with whether they will be able to sell your loan to Fannie or Freddie, peer-to-peer lending takes the power of lending money away from the government and puts it back in the hands of individual lenders and at least partially restores the relationship model of lending.

 Land Contracts or Lease Options to Purchase Real Estate

Take a look at your local Craigslist real estate listings (http://yourcity/craigslist.org/reo) and chances are you will find a home seller offering to sell their house via a land contract.  Alternatively, if you list your house to sell in that directory, you will certainly get emails or calls from potential buyers asking if you would consider a land contract or lease-option.  Land contracts and lease options are two ways that real estate ownership changes hands without financing from a bank.  In a land contract, the seller acts as the bank and the buyer makes regular payments straight to the seller for an agreed upon number of years.  In a lease-option, the buyer is considered a “tenant owner” and makes rental payments to the seller that not only cover rent but also pay down the balance on the agreed upon sale price.

Even more so than with with peer-to-peer lending, there is a necessary relationship of trust that is built between the buyer and seller.  As a buyer (or tenant owner) it is your job to convince the seller that you will make your payments and fulfill your part of the contract.  The seller for their part may request W2s, pay stubs, bank statements, or a down payment … just like a bank.  The difference is that the decision whether to lend money is brought down to the individual level.  The Social Credit Score of the buyer is paramount in this transaction whereas the FICO score is secondary or not a factor as all.

Conclusion

The concept of a Social Credit Score is not meant to reduce lending standards but rather to bring the lending decision from a national level to a personal or company level decision.  If your credit truly is bad, then it’s very likely that your Social Credit is as well.  For those of you with a few dings on the FICO score but good financial situations otherwise, consider alternate means of funding your projects that rely on Social Credit.  It’s time to break free from your three digits.