Free Startup Idea Fridays: The Credit Score Must Die

This is my latest post in my Free Startup Ideas series.

I've been coming up with business ideas since my earliest childhood memories. Most of them have been absolutely terrible. Some of them have been decent. And now I'm going to give away some of my best ones for free.

Am I really give these ideas away with zero expectation of return? Absolutely.

  1. Ideas are worthless. It's all about execution. If you want to take one of these ideas and run with it, do it. I'll even be happy to give you a brain dump with all of my notes on the idea as I’ve been thinking about most of them for a while.
  2. I take coffee meetings all the time with people looking for startup ideas. Perhaps one of these ideas will help them spark a new idea of their own.
  3. I want to get these ideas out of my head to clear some of my brain's RAM. That way I can come up with new and better ideas.
  4. I like giving things away and planting seeds.

Without further ado...

The Credit Score Must Die

Elevator Pitch: We are in the year 2015. We have incredible amounts of predictive data that allow us to measure and mitigate risk better than ever before. And yet, almost all consumer lending decisions are based on a credit scored developed in 1989. DTF (Death to FICO)* will utilize technology and predictive analytics to allow lenders to make the most risk conscious decisions and reward consumers based on actual metrics that matter.

Backstory: If you've ever had a problem with your credit score, you can skip ahead and avoid this painful story. Most of the financial world turns to three agencies for information about the creditworthiness of borrowers. All of these agencies rely on one thing: the FICO score. At some point in time, it was determined that your credit worthiness is calculated according to the following breakdown:

  • 35% is based on payment history
  • 30% is based on debt burden
  • 15% is length of credit history
  • 10% is based on type of credit used
  • 10% is based on recent searches for credit worthiness

Putting aside whether or not these are the right metrics (they are not), these three agencies all pull their information from different sources. This allows for major inaccuracies between reports. For a personal example, one agency has 9 different accounts for me and another has 15 (neither of which is correct). One of the agencies doesn't even realize that I have an auto loan that I've been paying for 4 years now! Another agency has a collection on my record that is for a completely different person, but it's my responsibility to run the gauntlet to fix this. To add insult to injury, it is almost impossible to work with any of these agencies to resolve any discrepancies in these reports.

It's time to do a way with an ancient system that never worked properly from day one.

DTF (Death to FICO)

It is most certainly possible to provide a better credit snapshot than what is being reported by FICO. Big data allows companies like Target to predict at a 15 year old was pregnant weeks before she told her parents and allows data scientists to predict intelligence level based on curly fries. Luckily, we have many more tools at our disposal. We can make career advancement projections based on company data, years since graduation and historical salary increases. We can review social media activity to determine personality types. We can analyze spending habits and savings rates.

These seem to me to be a much better indicator of credit worthiness than how many times someone else has run your credit in the past. The outdated model we use today is a snapshot of a person's life based on history. Let me ask you this?

Does the fact that I've paid my credit card on time really give you any indication of whether or not I'll be responsible with a mortgage that is 10,000 times greater than any credit card balance I've ever had?

Maybe. But, then again, maybe not.

Yes, we can build it, but does it matter

I go back and forth on this one. This may be the most difficult startup idea to execute or it may be one of the simplest. The incumbent FICO has such a stranglehold on the industry. This means that if you can come up with a product that is significantly better than what they have (at least 10x), you have a chance to win big marketshare before anyone knows that happens. It also means that many of the big financial institutions are going to be very resistant to change, because it's just the way things have always been done.

We are on step one of the big data and predictive analytics journey. There's no question we can use it to provide better lending decisions than the ancient FICO method.

* Sometimes I come up with random names for my startup ideas. Clearly these are not intended for public usage, but sometimes they provide me with a chuckle.