Could Personality Tests One Day Replace Credit Scores
Credit scores have drawn a lot of criticism over the years. They have even been accused as being a system by which the poor are held back from the advantages enjoyed by the rich: access to significant lines of credit. Some people are dismayed by the fact that their credit score could be the reason they are not getting hired from one company to the next. Still others see using credit scores as a means to raise car insurance rates as a dirty practice in the car insurance industry—especially since the government is the one allowing insurance companies to operate this way, and it is also the one requiring that drivers carry car insurance. With all the criticisms concerning how credit scores are being used, it raises the question if there is not a better way to determine the worthiness of an individual in such financial scenarios. Some researchers believe that personality tests may prove to be a far better method of determining the financial worth of an individual in such situations. In this respect, psychometrics are seen as a viable alternative to the current use of credit scores to expose the true financial and behavioral habits of an individual.
Administering the Test
In 2006, the Entrepreneurial Financial Lab (EFL) started testing individuals with personality tests to help determine if people with a thin credit history were as great of a credit risk as their credit score suggested. Using the questionnaire developed by EFL, a bank involved in the use of psychometrics as an indicator of a person’s financial worthiness made a 53-percent improvement to the number of clients it served. What was interesting about this increase was that loan defaults were reduced by 72-percent overall. These results seemed to suggest that maybe psychometrics are a better measure of a person’s financial habits than was implied by their credit score. By some estimations, psychometric analysis achieves a 91-percent accuracy rating in predicting how individuals choose to behave financially. Even if the current system of established credit scores was not replaced by the use of psychometrics in personality tests, the above statistics seem to suggest that the use of psychometrics can add a lot of insight and context to the process of determining where the real credit risks are in the general population. Perhaps it would be financially prudent to continue to test the accuracy of psychometrics by applying them to various financing options: like when people apply for title loans online.
Are Personality Tests a Fluke or Science-Based?
While personality tests have been used on more than one continent to accurately discern the financial behavior of borrowers, some might suspect that the results being achieved are just a fluke. However, the reality is that the psychometrics employed by EFL and others have been thoroughly tested. Utilizing the combined efforts of researchers at Harvard and Cambridge, these methods have been determined to be able to expose that people who are deceptive when applying for credit or loans are predictable in the ways they behave; thus, making it reasonably easy to pick these individuals out by the way they provide answers to a personality test. In fact, the Fair Isaac’s corp, developer of the FICO score, is impressed with the personality tests devised by EFL and has begun to implement their methodologies in those nations where it is difficult to determine who is and is not a credit risk. Though it may be a lengthy process, the use of personality tests to determine individual risk has the potential to include up to 3-billion people into the financial architecture of the global economy in areas where traditional testing methods are not well established for making such determinations. Again, if personality tests do not replace credit scores, they are certainly gaining momentum and solving problems that are not easily resolved under the current system.
Using psychometrics, banks and other lending institutions are able to more accurately gage the risk involved in opening loans and lines of credit with their clients. This, in turn, leads to a more stable banking system where defaulting is less prevalent. Eventually, it may be seen that personality tests are a more healthy way to gage risk in lending scenarios. Yet, a potential problem may be that certain individuals may be shoved to the side and never given the opportunity to advance, financially speaking, because a test, not their actual performance, makes them guilty of being a credit risk that is viewed as being too great on paper. How to prevent theoretical results from unfairly destroying opportunity may be the final frontier in the lending landscape needing to be overcome.