Opinion: Lenders Should Stop Trusting Credit Scores Alone

Recent changes in the credit reporting and scoring systems, as well as loopholes in the reporting process, are negatively impacting subprime lending decisions. 

The American Financial Services Association (AFSA) recently warned about serious problems, indicating that these risk-based tools aren’t as reliable as they once were. AFSA President and CEO Celia Winslow cautioned lenders about relying too heavily on the three-digit scores that at times don’t reflect consumer creditworthiness.

Since reports and scores are traditionally used for risk segmentation and pricing, subprime lenders especially should recognize the systemic trouble spots and take alternative steps to ensure greater accuracy and reduce defaults.

Lender margins are thinner than those in the prime lending industry, so lenders can’t afford to take unnecessary chances.  

Compressing Credit Risk Tiers 

Without true and complete information on credit reports, it’s all but impossible for scoring models to produce accurate scores. The result is credit score distortion. Risk tiers are compressed, making it seem that some people are less risky than they really are. 

First comes credit washing. When people falsely claim that identity theft is having a negative impact on their credit report, they can file disputes. When they do, items like late payments and defaults can be removed from their reports.  

TransUnion notes that this is a fast-growing challenge, and in 2026, Credit Union Today lamented the dramatic spike in the practice over the last five years.

Also compressing credit risk tiers is the absence of legitimate debt.

For example, when medical obligations have been sent to collections, they won’t appear on credit reports for a full year, and amounts under $500 won’t be listed at all. Yet these liabilities are still valid. If these trade lines weren’t suppressed, credit scores would be more accurate. 

“A fake score does not make someone a better borrower. It makes them a hidden risk.” — Celia Winslow, AFSA President and CEO in testimony before the House Financial Services Committee’s Subcommittee on Financial Institutions

Scrubbing credit reports of true but harmful data can result in cleaned scores and create near prime borrowers out of subprime borrowers. But if they do rise a level and qualify for unaffordable credit products, many borrowers end up failing again. That puts both them and lenders in a bad position. 

Adding to this dilemma is that reporting on the credit washing problem increases this type of activity. The more borrowers and predatory debt and predatory settlement companies know they can manipulate trade lines to temporarily boost scores, the more they take advantage.

Subprime lenders often move quickly on approvals, which increases the chance of taking on synthetically improved borrowers. 

Weakened Underwriting Certainty Complicates Risk

Because subprime lending already operates with thinner margins for error than the prime lending industry, it’s even more important to underwrite accurately. The implications are profound. Higher early payment defaults can result when lending to borrowers based on scores that make them appear more stable than they really are. 

A higher percentage of their income may already be promised to lenders you can’t see, or they aren’t equipped with the skills to manage their accounts. 

This increases loss severity on unsecured portfolios, but also on secured auto loans. In fact, AFSA said credit washing is contributing substantially to $10.2 billion in fraud losses hitting the vehicle finance industry. 

Pricing, too, has become more complicated. An artificially inflated credit score can result in lenders setting the wrong APR on various credit products. 

In the end, undependable credit scores lead to heightened regulatory risk. If lenders approve loans based on inflated scores and those loans fail, they can appear to be lending irresponsibly, even if the underlying issue is faulty data.

Subprime lenders are already under scrutiny. Lending based on credit scores that don’t reflect a borrower’s true credit history magnifies the pressure. 

Alternative Underwriting and Handholding 

Because false identity theft claims and incomplete credit reporting are having such an impact, lenders may want to deemphasize credit reports and credit scores until the industry rights itself.  Reports and scores are still valuable, but alternative underwriting can help lenders be more precise. 

Extra services can also keep the borrowers who slip through on track. 

• Focus on cash flow. Take a closer look at an applicant’s bank statements, expenses, and actual debt. The more you know, the better you can lend. 
• Create early warning systems. After lending, create a system that will alert you to potential defaults. 
• Have hardship plans already in place. Don’t wait. Know what you will offer to borrowers who fall behind before they actually do. 
• Track and reward success, however small. Even one on-time payment should get a “thank you, well done” text.

Unless credit reporting and credit scores return to where they should be — helping lenders provide the correct loans and credit cards with the right pricing to people — lenders will have to protect their interests by breaking free of the three-digit number that was once so reliable.