As economic pressures continue to price many prospective buyers out of homeownership, Fannie Mae and Freddie Mac are turning to new credit-scoring models in an effort to widen access to mortgages.

The two agencies—which guarantee ​most U.S. mortgages—will now accept loans evaluated using ⁠the VantageScore 4.0 model, which incorporates data such as rent and utility payments in addition to traditional credit information. The goal is to improve access to mortgages, enhance affordability, and foster a more competitive housing market.

However, the same economic challenges that have hindered homebuying also make accurately assessing creditworthiness imperative to protecting both consumers and lenders. Moving away from a tried-and-true model raises questions about potential risks in the years ahead.

“FICO scores set the gold standard for credit scoring, and their U.S. model has been used in all consumer collateral classes,” said Brian Riley, Director of Credit and Co-Head of Payments at Javelin Strategy & Research. “It has been tested in recessions and recovery environments for more than 40 years.”

“Lenders rely on the FICO score to manage risk from stem to stern,” he said. “These scores are used at the acquisition point, as a credit management tool, a retention tool, and even through capital markets for asset securitizations. It is a steady fact, more than 90% of credit card lenders rely on the FICO Score.”

Expanding Homeownership Access

While the importance of credit scores has not been widely disputed, some lenders have adjusted how they interpret them. For example, Fannie Mae and Freddie Mac have lowered their minimum 620 middle credit score requirement for certain home purchases and refinance loans.

The intent is to expand access to homeownership for borrowers with limited credit histories and to support “near-miss” applicants—those with sufficient income or cash reserves whose credit scores fall just below the 620 threshold.

The Best of Both Worlds

While there is broad agreement that challenges persist in the housing market, easing lending standards also carries risk if not carefully managed. As a result, a blended approach—combining traditional credit scoring with more current data on payments and debt behavior—is increasingly seen as essential.

“FICO Score 10T is an illustration of how FICO keeps its iconic scoring model relevant, as the mortgage industry requires tools that open access to borrowers who may be on the fringe,” Riley said. “The model includes trended data, such as rental payments and utilities, which will help issuers broaden access while keeping the credit score as a highly predictive risk management tool.”

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As one of the three major credit bureaus in the United States, Equifax has broad visibility into consumer credit behavior. In recent years, one notable trend has been the rise of first-party fraud, in which consumers knowingly exploit organizational policies for financial gain.

First-party fraud, sometimes referred to as consumer-engaged fraud or friendly fraud, can take many forms. One commonly cited example involves shoppers who purchase items online with the intent to return them and pocket the refund.

Equifax is leveraging its access to credit data to address two other prevalent forms of first-party fraud: loan stacking and credit washing. Loan stacking occurs when consumers rapidly apply for multiple loans with no intention of repayment, while credit washing involves attempts to remove negative information from a credit report.

To detect these patterns, Equifax is deploying its Credit Abuse Risk predictive model. The model’s primary objective is to identify suspicious application behavior in real-time, enabling lenders to be notified immediately and respond accordingly.

Justifiable Fraud

Stronger defenses are increasingly necessary, as first-party fraud has become the most common form of fraud. One reason for its growth is that many customers don’t view it as genuine fraud. Data from FICO found that nearly a third of respondents believe lying on credit applications is either justifiable under certain circumstances or simply common practice.

This mindset has been shaped by several factors, including digital anonymity and mounting economic pressure. In recent years, high inflation and elevated interest rates have ramped up financial stress, while credit card debt has prompted lenders to tighten underwriting standards.

As a result, some consumers feel validated in gaming their credit profiles or inflating details on loan applications.

When the Criminal Is a Customer

The proliferation of first-party fraud has created a new paradigm for the financial services industry, as threats increasingly originate from within the customer base rather than from external attackers. When the criminal is a customer, many organizations lack the tools and processes needed to identify and mitigate the threat.

Further muddying the waters is the emerging era of agentic commerce. As AI agents increasingly make purchases on behalf of consumers, organizations will face a host of new questions around responsibility in returns, accountability, and liability in cases of fraud—whether first-party or otherwise.

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Building and maintaining a good credit score is generally challenging, but newcomers to a country often face an even steeper climb.

A study by TD Bank found that individuals who have moved to Canada within the past five years have struggled to make headway in the country’s credit system. The survey revealed that roughly 80% of these new residents had applied for credit since their arrival, with the majority encountering difficulties during the application process.

The top three challenges cited were limited knowledge of how credit card rewards work, a lack of understanding of Canada’s financial system, and reduced ability to qualify for higher credit limits and loans.

Many respondents said the lower credit limits and loan amounts weren’t sufficient to meet their needs, and approximately 60% said they would have a better quality of life if they had improved access to credit. Most also said it was difficult for newcomers to build a credit history in Canada.

Shying Away from Risks

Credit bureaus and lenders now have access to more information about consumers than ever before. Research suggests that adult credit access is influenced by childhood experiences, including the family and neighborhood in which a child grows up.

Several factors have recently impacted consumer credit scores across the board—such as high inflation and rising interest rates. These conditions have led lenders to tighten lending standards and lower credit lines. Additionally, many credit card companies are now focusing on affluent customers—considered more stable—and are avoiding higher credit risks.

Impacts on Newcomers

These combined factors particularly affect newcomers to countries who lack extensive credit histories and often do not belong to higher income brackets. These consequences can be far-reaching. According to TD Bank, roughly 22% of respondents who applied for credit reported insufficient access to maintain a comfortable lifestyle.

Because of this lack of access, respondents indicated experiencing increased financial stress levels, limited ability to take out loans, higher interest rates, and even difficulties in securing housing.

The post Why Newcomers to Canada Struggle to Build Credit Histories appeared first on PaymentsJournal.

For now, Klarna and Afterpay have declined to participate in the new credit scoring model that incorporates consumers’ buy now, pay later (BNPL) loan information.

In contrast, competitor Affirm has been working with FICO to develop two credit score models that include BNPL data. These models aim to give lenders a clearer picture of how leveraged a consumer is with installment loans. Affirm has also begun reporting its loan data to Experian and other credit bureaus earlier this year.

However, according to the Wall Street Journal, Klarna and Afterpay are pushing back on following Affirm’s lead, citing concerns for their customers. The companies said credit bureaus aren’t receiving real-time, accurate data on BNPL loans, which could negatively impact consumers’ creditworthiness.

“A strong differentiator for BNPL products is to be a way for their customers to use a form of credit without having to necessarily rely on the stricter underwriting of a credit card,” said Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research. “This is built into the fabric of BNPL firms’ marketing strategies.”

“I see two main issues,” he said. “First, Klarna and Afterpay view the current scoring models as built on the legacy of credit cards and these models are not updated to reflect the novelty of BNPL. Second, Klarna and Afterpay want FICO to guarantee that the scoring data will not penalize the scores of their customers.”

Assessing Phantom Debt

Despite these objections, data from FICO showed that the inclusion of BNPL loan data didn’t have widespread impacts on credit scores. Of the loans taken out through Affirm, FICO found that they affected credit scores by roughly 10 points for over 85% of those surveyed.

Separately, Affirm pushed back against the idea that the surge in BNPL lending has created substantial “phantom debt” that isn’t captured by traditional credit scoring models. It stated that BNPL loans amounted to only a fraction of credit card debt and that delinquencies were rare.

A Tough Ask

Considering this data, the decision by Klarna and Afterpay to withhold their data is perplexing—especially in the case of Klarna, which has been expanding its partnerships and services ahead of a potential IPO this year.

For their part, Klarna and Afterpay argue that if each BNPL loan is treated as opening a new credit line, it could quickly affect customers’ creditworthiness. Afterpay stated it would not share data with credit bureaus until it has concrete evidence that doing so wouldn’t negatively impact its customers—a high bar to clear.

“To satisfy that demand, FICO could only use positive behavior in their scoring, which isn’t objective,” Danner said. “If Klarna’s BNPL delinquency rate is below 1% as they report, it is actually better performing than credit cards—so the impact of reporting does not seem as significant as one might think.”

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Credit card issuers are navigating a landscape filled with macroeconomic challenges, regulatory uncertainty, and financially strained consumers. Unfortunately, the road ahead remains uncertain, making it critical for issuers to take proactive measures to protect themselves as charge-offs and delinquencies mount.

In the Credit Card Databook, Part 2: Balancing Risk and Reward in a Resilient Economy report, Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research, detailed the challenges plaguing the credit card industry and the steps issuers can take in the face of increasing uncertainty.

Higher Rates, Higher Risk

The report delved into the macroeconomic factors impacting the industry—from unemployment to inflation. High interest rates have also posed a key challenge for both consumers and organizations.

Though the U.S. Federal Reserve has kept rates high, it has recently considered rate cuts that would lower the prime loan rate for banks, potentially reducing credit card interest rates.

“There’s a whole art and science as to when to initiate those cuts,” Danner said. “Credit card interest rates have skyrocketed into 23% to 24% range. The Fed started to cut rates, so they’ve been coming down slowly. That’s offered a bit of breathing room for consumers, especially since credit card balances have been historically high.”

The historic level of consumer credit card debt did not abate in the latter half of last year, leading to an increase in delinquencies and charge-offs. As a result, credit card issuers are closely monitoring the number of customers making full balance payments.

“Everyday consumers are holding on to these record-level high balances at these high interest rates, so there’s going to be a lot of pain with revolvers and in vulnerable segments,” Danner said. “We’ve seen a rise in the amount of customers that are making only the minimum payments, which is a little scary because it means they’re revolving. It’s a number you don’t want to see go up.”

A notable discrepancy exists between large and small banks. Many regional banks have different value propositions than their larger counterparts and, as a result, often maintain lower underwriting standards.

For this reason, smaller banks typically experience higher delinquency rates on credit cards than larger banks. This has led to surge in delinquencies, with smaller banks reaching over 7.5% in their card portfolios compared to 3% for larger financial institutions. The gap is even more pronounced because most larger banks are better equipped to weather these challenges.

A Mantra of Uncertainty

Credit card issuers are also braving a regulatory environment with little certainty moving forward. In recent years, several proposed rules could directly impact the industry, such as the Sanders-Hawley bill, which would cap credit card interest rates at 10% for a five-year period.

“That would have severe consequences,” Danner said. “Interest income is a huge piece of how credit card programs operate, and if you were going to cap that at 10%, that would have very significant consequences for programs. You could see things like increased annual fees on cards, declining rewards programs, and you could even see some programs going away entirely because they wouldn’t be able to fund it.”

There have also been recent discussions about reviving the Credit Card Competition Act, which was designed to curb the market dominance of Visa and Mastercard. The bill would require issuers to provide retailers and organizations with an alternative card network not operated by the credit card giants, potentially leading to substantial industry shifts.

Additionally, a new presidential administration in the U.S. brings further uncertainty, as many of its initiatives could directly affect the credit card industry. For example, several actions by the Consumer Financial Protection Bureau (CFPB) have been shelved or eliminated, leaving the future of these efforts in limbo.

“It’s the mantra that we’ve been using, but there is still a lot of uncertainty out there,” Danner said. “Even the idea with all these tariffs on some of our closest trade partners, that could have profound changes. It could trickle down into higher prices for consumers on goods, and higher prices means potentially less spending because consumers are tightening their wallets. It’s a cascading thing with some of these economic topics—it gets complicated quickly.”

Tightening Standards

With so much doubt, it has become clear that risk management is a central priority for credit card issuers. This has already been reflected in originations, where issuers are tightening their underwriting standards. As a result, fewer subprime and below-prime customers may be approved for credit cards in the coming months.

“The other tool they have in their toolkit is the way they can adjust the credit lines,” Danner said. “Overall, over the past year or so, credit line increases have been declining. They’ve been tightening the amount of available credit that they’re putting out to customers. It’s just another way of mitigating risk ever so slightly, although it’s less refined.

Many card issuers have fewer mechanisms in place to decrease credit lines than to increase them, even though credit line reduction programs are an important risk management tool. If a customer is struggling to pay their bill, it’s critical to have a program that can reduce their available credit, as this helps limit the bank’s exposure on that card product.

The overarching trend in the credit card industry toward tightening controls was confirmed by data from the Senior Loan Officer Opinion Survey conducted by the U.S. Federal Reserve.

“They’ve been somewhat loosening standards over the past year, but might end up tightening up again, particularly as they have to curtail some of these issues with delinquent and charged-off accounts with the higher rates that we’ve been seeing,” Danner said. “Issuers have been looking at all these trends and they’ve been responding. If you’re not responding, maybe now is the time to tighten up your underwriting just a little bit.”

The post Why Risk Management Should be Top of Mind for Credit Card Issuers appeared first on PaymentsJournal.

The Consumer Financial Protection Bureau (CFPB) has sued credit bureau Experian, citing instances where the organization failed to adequately address inaccuracies in credit reporting.

Experian, TransUnion, and Equifax are the three main credit reporting agencies in the U.S. responsible for maintaining the files used to gauge a consumer’s creditworthiness. In Experian’s case, the CFPB found instances where the organization only gave a cursory “sham investigation” into customer complaints about inaccuracies in their credit score, and even reinserted false information back into some credit scores.

“Consumers are entitled to accurate credit reports, and lenders need data that accurately represents the quality of borrower payment habits,” said Brian Riley, Director of Credit at Javelin Strategy & Research. “Accurate reporting issues have been around since the Fair Credit Reporting Act was created 55 years ago.”

“What is interesting about the CFPB’s case is that the concern is not about the ongoing issue of pristine reporting, which generated more than half a million complaints, but rather about the failure of one of the three major credit reporting agencies to handle disputes,” he said.

Bad Habits

Two years ago, the CFPB issued a report that examined the credit dispute processes at all three credit bureaus. It found that the bureaus had largely improved their credit dispute protocols, and were taking a more proactive, personalized approach to complaints.

The CFPB’s new action against Experian alleges the firm has reverted to its previous bad habits regarding disputes, and it prohibited the organization from further misconduct. The lawsuit would require Experian to reimburse any affected customers, pay a penalty, and return any funds it received because of unfair practices.

An Isolated Case?

Accurate credit scores are critical, because they could do significant damage to a consumer’s financial position. However, Experian released a statement noting that it had done nothing wrong. The firm said it had attempted to cooperate with the CFPB, but those efforts were ignored.

Experian called the lawsuit “completely without merit,” and noted that it had a strong legal position and that it was confident it would prevail against the CFPB’s action.

“CFPB points to inaccurate logging and resulting in complaint resolution for America’s almost 200 million adults that hold credit cards,” Riley said. “We will have to wait and see if Experian was an isolated case or will suits also follow for their competitors Equifax and TransUnion.”

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The Federal Trade Commission is sending more than $2.5 million to consumers who were manipulated by false credit card offers on Credit Karma’s platform.

The payments are the fruition of an action the FTC brought against the fintech two years ago, after it discovered “dark digital patterns.” The agency alleged that Credit Karma presented users with card offers that they were “pre-approved” for, or had “90% odds” of acquiring, when in reality they did not qualify.

“The credit card industry is tightly regulated, and consumers are generally protected against unfair, deceptive marketing practices,” said Ben Danner, Senior Credit and Commercial Analyst at Javelin Strategy & Research. “This reiterates to industry participants that deceptive advertising campaigns will not be tolerated in the credit space.”

Accumulating Data

Credit Karma might be best known for its credit score and credit reporting tools, but to access those services consumers must provide their personal data. The FTC reported that Credit Karma accumulated more than 2,500 data points on its users, including credit and income information. The company then leveraged that data to send personalized ads and credit card offers.

Once a customer clicked on a “pre-approved” credit offer, the platform initiated a hard pull of the user’s credit report, which had the potential to damage the customer’s credit score if the card was denied.

According to the FTC, Credit Karma was aware that its pre-approved card offers created false hope for consumers. In training materials for its customer service personnel, Credit Karma expressly mentioned that denial of a pre-approved offer was a common customer complaint.

Almost a third of Credit Karma’s “pre-approved” customers were denied after making applications. Though the fintech mentioned that denial was possible, that information was often buried in legal disclaimers.

Coming to a Head

Regulators have become increasingly concerned about the role fintechs play in the banking-as-a-service model. Though most financial technology companies are heavily involved with consumer financial data, they aren’t subject to the same regulations that financial institutions must follow.

Those issues came to a head after the Synapse failure, by which the fintech’s lax accounting practices cost its customers millions. There was widespread speculation that the severity of that collapse could lead to a reset of the BaaS model, and the FDIC has recently rolled out new rules designed to hold fintechs accountable to the same rules as banks.

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The Consumer Financial Protection Bureau (CFPB) has proposed a new rule that would stop credit reporting companies from sharing medical debts with lenders and prohibit card issuers and other lenders from making decisions based on medical information. For credit card issuers, the decision may not significantly impact their bottom line—but could lead to more widespread card usage.

The CFPB’s decision follows research indicating that a medical bill on a person’s credit report is not a good predictor of their ability to repay a loan. In fact, medical debts can make underwriting decisions less accurate and have led to thousands of denied credit applications that consumers would likely repay.

The announcement did not address credit card issuers directly, but it did discuss the impact on mortgages. Because of improved underwriting, the CFPB expects the proposed rule to lead to the approval of approximately 22,000 additional mortgages every year.

A similar logic would apply to more individuals getting approved for credit cards. “We expect that Americans with medical debt on their credit reports will see their credit scores rise by 20 points, on average, if today’s proposed rule is finalized,” the CFPB said.

The Numbers Behind the Decision

Roughly $88 billion in medical debt is reflected on Americans’ credit reports, although the total amount is likely higher because some debt is not reported to the credit agencies. An analysis of government data by Peterson-KFF estimates that people in the United States owe at least $220 billion in medical debt.

So why does this not affect their ability to repay? Research on this has been trickling out for years. Nearly a decade ago, the CFPB released a report showing that medical debts provide less predictive value to lenders than other debts. The credit agencies then experimented with newer credit scoring models that weighed medical debt less heavily, resulting in an average 25-point increase in FICO scores.

The three largest credit agencies—Equifax, Experian, and TransUnion—have already taken this information into account. They stopped including some medical debt on credit reports in 2023, such as paid-off bills and those for less than $500.

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