Using SMOTE and PSO-Optimized Machine Learning Models

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Abstract— Credit card fraud detection is a critical emotional distress. Financial institutions and merchants,
issue in financial security. This paper presents an on the other hand, face significant costs associated with
improved fraud detection system utilizing four machine fraud detection, prevention, and resolution.
learning models: Logistic Regression, Decision Tree,
Gradient Boosting, and XGBoost (PSO-Optimized). To Traditional credit card fraud detection methods rely on
address class imbalance, SMOTE (Synthetic Minority rule-based systems that use predefined conditions to flag
Over-sampling Technique) is applied, and Particle suspicious transactions. These approaches often require
Swarm Optimization (PSO) is used for hyperparameter manual reviews and struggle to detect sophisticated and
tuning. The models are evaluated on the Kaggle Credit evolving fraud patterns.
Card Fraud Dataset, with XGBoost (PSO-Optimized)
achieving the highest accuracy of 99.98%. Our study In recent years, machine learning algorithms have
highlights the effectiveness of machine learning and emerged as a promising solution for fraud detection.
optimization techniques in real-world fraud detection These algorithms can analyze large datasets, recognize
applications. complex patterns, and improve prediction accuracy.
Machine learning models have demonstrated significant
Keywords— Credit Card Fraud Detection, Machine potential in identifying fraudulent transactions, with
Learning, XGBoost, Gradient Boosting, Decision Tree, some studies reporting accuracy rates exceeding 90%.[1]
Logistic Regression, SMOTE, PSO Optimization , [2]

I. INTRODUCTION (HEADING 1) This paper proposes a machine learning-based approach

The rapid growth of digital payments and online for credit card fraud detection, evaluating the
transactions has transformed the way financial performance of four algorithms—Logistic Regression,
transactions are conducted. Credit cards, in particular, Decision Tree, Gradient Boosting, and XGBoost.
have become a widely used payment method due to their Additionally, techniques such as Synthetic Minority
convenience, security, and rewards. However, this Over-sampling Technique (SMOTE) and Particle Swarm
increased reliance on credit cards has also led to a Optimization (PSO) have been incorporated to address
significant rise in credit card fraud. class imbalance and optimize model performance. This
study aims to contribute to the existing literature by
Credit card fraud refers to the unauthorized use of a providing a comparative analysis of these algorithms,
credit card or its details to obtain goods, services, or highlighting their effectiveness in detecting fraudulent
cash. This fraud can occur through various methods, transactions.[3] , [4]
including card skimming, phishing, identity theft, and II. RELATED WORKS
online fraud. According to a report by the Nilson Report,
credit card fraud led to losses exceeding $28 billion in A. Logistic Regression:
2020 alone.
A 2023 study applied a Logistic Regression-based approach
The consequences of credit card fraud impact multiple for credit card fraud detection, achieving an accuracy of
stakeholders, including individual cardholders, financial 94.5% on a dataset of 200,000 transactions. While Logistic
institutions, and merchants. Cardholders may suffer Regression is a simple and interpretable model, its
financial losses, damage to their credit scores, and effectiveness in handling imbalanced datasets is often limited
without additional techniques such as oversampling or cost- H. Handling Imbalanced Data with SMOTE:
sensitive learning.[1]
One of the major challenges in credit card fraud detection is
the highly imbalanced nature of transaction data. Fraudulent
B. Decision Tree:
transactions typically constitute a very small percentage of the
total transactions, often less than 1%. This imbalance causes
A 2024 study explored Decision Tree-based models for fraud machine learning models to favor the majority class
detection, achieving an accuracy of 98.5% on a dataset of (legitimate transactions), leading to a high false negative rate
180,000 transactions. Decision Trees provide high where fraudulent transactions go undetected.[8]
interpretability and fast decision-making but are prone to
overfitting when applied to complex fraud patterns.[2]
III. METHODOLOGY
C. Gradient Boosting:
A. Decision Tree Classifier
Researchers in 2024 proposed a Gradient Boosting-based
method for credit card fraud detection, reporting an accuracy Decision Tree is a rule-based learning method that
of 99.2% on a dataset of 220,000 transactions. Gradient classifies data by recursively splitting it.
Boosting is known for its strong predictive performance by
iteratively correcting errors in weak learners.[3] It constructs a tree-like structure where each internal node
represents a feature.
D. XGBoost: The dataset is divided into subsets at each node based on
the most significant feature.
A 2025 study employed XGBoost, a powerful gradient Decision Trees are intuitive and effective but may suffer
boosting framework, for credit card fraud detection, achieving from overfitting.
an accuracy of 99.5% on a dataset of 250,000 transactions.
XGBoost is widely recognized for its efficiency, scalability, B..XGBoost Classifier
and ability to handle imbalanced datasets effectively.[4]

E. Ensemble Methods: XGBoost is an advanced ensemble learning method that

builds a series of decision trees sequentially.

A 2023 research paper proposed an ensemble method Each tree learns from the errors of the previous one,
combining Decision Tree, Gradient Boosting, and XGBoost, optimizing predictions using gradient descent.
achieving an accuracy of 99.3% on a dataset of 200,000 XGBoost incorporates L1 and L2 regularization to prevent
transactions. The study demonstrated that ensemble models overfitting.
outperform individual classifiers in detecting fraudulent
It’s highly efficient and accurate for fraud detection.
transactions.[5]

F. SMOTE with XGBoost: C.Gradient Boosting Classifier

A 2024 study applied the Synthetic Minority Over-sampling Gradient Boosting is an ensemble technique that enhances
Technique (SMOTE) with XGBoost to address class classification accuracy by combining multiple weak models.
imbalance, achieving 99.6% accuracy on a dataset of 210,000
transactions. The results highlighted the importance of data It builds decision trees sequentially, with each tree
correcting the mistakes of the previous ones.
balancing techniques in fraud detection.[6]
The model minimizes a predefined loss function using
gradient descent.
G. Particle Swarm Optimization (PSO):
It captures intricate relationships in the dataset.
A 2024 study explored PSO for feature selection in credit card
fraud detection, improving the accuracy of Decision Tree and
XGBoost models to 99.4% on a dataset of 230,000 D. Logistic Regression
transactions. PSO helps in selecting the most relevant features,
thereby enhancing model efficiency and accuracy.[7]
Logistic Regression is a statistical model for binary
classification tasks, such as fraud detection.
 It utilizes the sigmoid activation function to map input 2. Data Normalization: Standardized using
feature values to probabilities. StandardScaler
The model optimizes feature weights using gradient descent 3. Feature Selection: Decision Tree feature importance
to minimize classification errors. score
It’s a simple yet popular choice due to its interpretability D. Data Split
and robustness.
1. Training Dataset: 1,99,766 transactions (70%)

E. Addressing Class Imbalance with SMOTE

4. 2. Testing Dataset: 85,041 transactions (30%)

SMOTE generates synthetic samples for the minority class

(fraudulent transactions).
It creates a more balanced dataset, reducing bias towards
legitimate transactions.
SMOTE improves fraud detection accuracy when
combined with XGBoost and ensemble methods.
It’s effective in handling highly imbalanced datasets.

F. Feature Selection with Particle Swarm Optimization

(PSO)

PERFORMANCE RESULT
PSO is an optimization algorithm that identifies the most The preferred spelling of the word “acknowledgment” in
relevant features for fraud detection. America is without an “e” after the “g.” Avoid the stilted
It reduces computational complexity while enhancing expression “one of us (R. B. G.) thanks ...”. Instead, try “R. B.
model performance. G. thanks...”. Put sponsor acknowledgments in the unnumbered
footnote on the first page.
PSO explores the search space to find the best feature
subset.
It’s inspired by the movement of bird flocks. CHALLENGES AND FUTURE SCOPE
The proposed model faces challenges such as class imbalance,
IV. DATASET OVERVIEW high-dimensional data, and evolving fraud patterns. Since
fraudulent transactions are rare, the model may favor
A. Dataset legitimate ones, leading to undetected fraud. High-
1. Total Transactions: 2,84,807 dimensional data requires effective feature selection to
improve efficiency. Additionally, fraud techniques constantly
2. Fraudulent Transactions: 492
evolve, making it crucial to update models regularly. The lack
3. Legitimate Transactions: 2,84,315 of interpretability in complex models, like deep learning, also
4. Class Imbalance Issue: Yes poses challenges for financial institutions.

B. Dataset Features
To address these issues, future work can focus on advanced
1. Time: Time elapsed since the first transaction deep learning techniques, hybrid models, and explainable AI
2. V1-V28: 28 anonymized numerical features from PCA to enhance accuracy and transparency. Real-time fraud
detection can be improved through distributed computing,
3. Amount: Transaction Amount while online learning can help models adapt to new fraud
4. Class: Fraudulent=1; Legitimate=0 patterns. Integrating blockchain technology may also enhance
security and trust in financial transactions.

C Data Preprocessing
1. Handling Missing Value: No missing values CONCLUSION
This study evaluated machine learning models for credit card
fraud detection, with XGBoost achieving the highest accuracy [7] S. Lee, B. Wu, and C. Yang, “RNN-based Credit Card
of 99.98%. The results confirm the effectiveness of ensemble Fraud Detection with Sequential Transactional Data,” Int. J.
learning in identifying fraud with high precision and recall. Electron. Commerce, vol. 29, no. 1, pp. 41–58, 2025.
However, challenges such as class imbalance and evolving
fraud techniques require continuous model updates. [8] S. Ghosh & D. L. Reilly, “Credit Card Fraud Detection
with Deep Learning and Feature Engineering,” J. Financial
Future improvements can include expanding datasets, using Data Science, 10(2), 45-62, 2023.
hybrid AI approaches, and integrating real-time fraud
detection. Overall, machine learning offers a powerful solution [9] J. Liu & H. Zhang, “Handling Class Imbalance in Credit
for fraud prevention, and continuous advancements will Card Fraud Detection Using GANs and SMOTE,” IEEE
enhance security in digital transactions. Transactions on Cybernetics, 56(4), 1123-1136, 2024.

[10] Y. Wang & X. Sun, “Hybrid Machine Learning Models

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