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Want to take out a loan? Be careful who your friends are

Ever wondered how your connections and activity on Facebook and Twitter would impact your ability to buy a house?

When I joined Facebook 6 years ago, I thought it would be a passing fad. The latest social media trend to follow from MySpace and Bebo, which would simply allow me to stay in touch with my school friends as we all headed off to university.

I was wrong. Social media is becoming an increasingly influential part of our lives, with our activity now being monitored and used in ways many of us probably never thought possible. Governments are able to request our data from Facebook, and now banks starting to analyse our profiles to determine our level of risk in borrowing. There are a few ways in which they do this:

  • Check how influential a user is on social media
  • Check whether a user’s social media connections have had problems repaying loans, and the level of contact users have with such connections
  • Ask a user’s connections to recommend whether or not you are a good risk (although this should not be done without the user’s permission)

Movenbank, an American online bank is well known for using social media in this way, and according to this article in the Telegraph, it is looking at a move into the UK, which could see Brits being granted or rejected for loans or mortgages, based on their level of social media influence.

But is social media influence a reliable factor for determining a person’s level of financial risk? It depends a great deal on how this social media influence is calculated. In this case, it seems influence is based on how many connections a person has. As Movenbank’s founder, Brett King, suggests: “if someone has 5,000 friends and posts something good or bad about the service they got at a bank, these 5,000 people will see that, which is inevitably good for business”. What’s important to remember is that on social media, friends and followers is all about quality, not quantity. There are robots, spam users and fake accounts out there; if a user has 5,000 spam-bots following them, how can a bank accurately determine whether they’re a worthwhile investment? In fact, you may argue someone with a following of 5,000 spam-bots is untrustworthy, and thus a risky investment.

So should we disregard social media altogether? Should we stick with the traditional means of determining financial risk such as Experian credit scores?

Consumers are spending an increasingly large proportion of time on social media sites, which means they are sharing more data about themselves than ever before. All our check-ins, Facebook statuses and updates provide a view of the type of lifestyle we lead. LinkedIn should not be disregarded either; information about our employment status can be extremely useful in determining our creditworthiness. For example a senior manager is probably more likley to be able to repay a mortgage than a student. By analysing this data, financial institutions can gauge the type of lifestyle a person leads, and use it to determine whether we’re a worthwhile investment, or whether we’re just likely to fall into an endless spiral of debt.

It’s great that banks are looking to use social media data in new and interesting ways. There’s a lot of it out there, and many financial institutions aren’t utilising its full potential. But banks should be aware that they can’t rely on social media data alone. Analysing social media data can be a viable way of determining a person's level of financial risk, but it should be used alongside the traditional methods.

And what about us users, who may think we’re using Facebook and Twitter as tools to communicate with our closest friends, but are actually being closely monitored? Scary as it seems, the things we say and do on social media sites may have a more long term impact on our lives. My advice – be careful who your friends are. Your connection who left high school at 16 may be one of your closest friends, but they may affect your credit score in the eyes of a bank.