Here at Leadingham Rodgers, our CPAs like to preach that, when change comes, successful individuals and businesses adapt. That’s what we are preaching to our customers, as artificial intelligence becomes more entrenched in the way we behave and do business. When it comes to personal finance, we are now seeing the rise of AI credit and lending.
Traditional credit scores—otherwise known as FICO (the Fair Isaac Corporation)—came on the scene circa 1989. FICO scores changed the game. They removed bias and, most importantly, provided the lending industry a semblance of objectivity. They weren’t perfect, but those who understood the rules and took advantage of them were rewarded for it.
Just 32 years later, it looks like traditional credit scores are on their way out. Artificial intelligence is rapidly eating into the market share—and for good reason. AI credit is far more efficient, effective, and profitable. Better yet, AI credit benefits both lenders and borrowers alike. That’s why, as Alabama’s top CPA firm, Leadingham Rodgers is helping clients rethink their approach to credit.
What Are Credit Scores Anyway?
Credit scores come with a ton of jargony terms and confusing details. For example, racking up a ton of debt is bad for your score, but at the same time, the more lines of credit you have open, the higher your score.
Then there’s the question of how your credit score affects you. We know it helps lenders determine your risk. However, this also dictates how you behave, financially, in ways that don’t always seem related to you as a potential liability to lenders.
The FICO Score’s Five Tenets
Let’s try to simplify things. There are five basic tenets to your credit score.
- Credit history: Lenders want to know whether you pay your bills on time—especially your credit and loans.
- Outstanding Balance: While opening lines of credit is good for your score, running up the tab on any particular line of credit is not so great. When it comes to FICO scores, you don’t want to max out that AmEx card.
- Credit Longevity: How long have you been using credit? The longer, the better, according to traditional credit scores.
- Credit Mix: What’s the diversity of your credit? Do you only have one credit card, or do you have a mortgage, business loans, revolving credit facilities, leases, etc. The more diverse your credit, the better your traditional credit score.
- Credit frequency: Also referred to as New Credit, credit frequency tracks how often you open new lines of credit. The more frequent, the higher your perceived credit risk—and you guessed it, the lower your score.
The FICO Effect
FICO scores were far better than the eye test. Prior to credit scores, lenders interviewed people and determined for themselves whether to approve loans and credit facilities. Imagine interviewing strangers to try and figure out if they were likely to pay you back. Sure, you might judge a few people correctly. Generally, it’s an unreasonable way to go about judging credit risk.
But FICO scores have their own fallibility—if not outright absurdity. Take open lines of credit, for example. People abuse this system by churning credit cards. That is, they open new credit cards simply for cash bonuses upon spending a certain amount of money within a specified period of time. Because a history of repayment helps your FICO score, the more you do this, the better your credit.
There’s nothing necessarily wrong with churning credit cards. Here at Leadingham Rodgers, our professional CPAs would never chide you for taking advantage of this opportunity. But the ability to pay back a one-time spending spree isn’t a great determination of overall risk. Aspects of traditional credit scores such as these make for a flawed system.
What Is AI Credit Anyway?
Artificial Intelligence Meets Credit
At the turn of the millennium, we entered the technological renaissance. Here in 2021, we are at the dawn of artificial intelligence. Each day that passes sees more jobs and tasks being automated. It was only inevitable that AI would find its way into the lending industry.
Artificial intelligence uses a group of elegant mechanisms to create computers and machines that, in essence, can think for themselves. AI’s real draw lies in the idea that these computers and machines can perform these tasks better than we can. While we are a long way from AI CPAs, we are already at the dawn of AI credit.
Upstart is one of the leading AI credit companies. A former Google employee, Upstart’s CEO, David Girouard, believed that the lending industry was highly inefficient. As knowledgeable and experienced CPAs, we agree: Leadingham Rodgers has seen countless individuals fail to qualify for loans that they deserved, and vice versa.
A Renaissance In Credit
This inefficiency is a real drag on the economy. It prevents people from getting money they need for everything from new business ideas to basic needs, like shelter. With AI credit, Upstart works with banks to create loans at much higher frequency and far lower interest rates. They do this by using extremely complex algorithms that configure something very simple: whether someone is likely to pay the money back. But rather than live by five mediocre tenets, Upstart uses over a thousand incredibly relevant and accurate variables.
What Does This Mean For Me (And My Business)?
As the savviest of businessmen and women like to say, in the face of evolution, we must either adapt or die. Our CPAs here at Leadingham Rodgers are urging clients to take the rise of AI credit into consideration. Of the many reasons for doing so, here are a few of the most important.
The Rules Have Changed
Take any popular sport, for example. As time moves on, the rules change, along with the way the game is played. Usually, one begets the other, but sometimes they happen simultaneously.
Financial regulators haven’t sent a memo to Leadingham Rodgers regarding the rise of AI credit. It hasn’t gotten big play on the news. But it’s happening, and people are still stuck in the old ways.
It’s not entirely clear what makes for a low-risk loan. Companies like Upstart aren’t exactly quick to disclose proprietary information with respect to their patented technology. What is clear is that many aspects of traditional FICO scores don’t play a major role in what makes a creditworthy individual or business.
So What Can We Do About It?
Does credit diversity really matter? Longevity? Are these things really as important as repayment history? What about salary? What about other personality traits measured through certain behaviors? While we don’t yet know exactly how AI measures creditworthiness, we can assume one thing:
Your credit is better than ever.
We might not know how Upstart does it, but the expert CPAs here at Leadingham Rodgers keep up with the latest trends in finance and accounting. The data shows that, when it comes to efficacy, AI credit blows traditional credit scores out of the water. Meaning, AI lenders such as Upstart can make far more loans, and far cheaper loans.
In no way are we encouraging clients to borrow more money. However, if you do need to borrow, and for good reason, it’s clear that an AI lender is the way to go. With such amazing success in the mortgage industry, AI lenders are now moving aggressively into car loans.
The Bottom Line
AI lenders experience less defaults, better repayment rates, and create far more loans per capita than traditional lenders. Borrowers pay lower interest rates, get more access to credit, and are therefore more likely to achieve their financial goals.
Leadingham Rodgers has great respect for the American economy. It remains the shining example of prosperity and the spirit of hope and optimism. This is exactly why we are so bullish on AI credit and have spread awareness among our client base.
As dedicated CPAs, our number one priority is to improve the bottom line for our clients, both individuals and businesses alike. For more information about the latest trends and evolutions in modern finance and accounting, give us a call or visit us online. We can immediately help improve your budget, tax filings, efficiency, and much more.
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The American lending industry is witnessing a revolution. Traditional credit scores are seeing their last days, as artificial intelligence has proven, beyond a shadow of doubt, superiority over FICO scores and its associated metrics of creditworthiness. That’s why our professional CPAs are having candid conversations with clients about how and where to seek lending. That’s what Leadingham Rodgers is here for. Contact us today for your free consultation.