Credit Score

Credit Score Reason Codes: What They Mean and Why You Should Care

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While knowing your credit score is important, understanding the context of where your score resides within the overall score range, and having insight into why it’s not higher, empowers you to focus on score improvement strategies that will help you successfully increase your credit score and gain access to better credit terms—which ultimately saves you money.

When a credit score is generated, there are a series of credit related questions being asked by the scoring model, and the answers for each question will depend on the information (or data) being reported in your credit report. Points for each answer to each question are assigned and the sum of these points is generated to create your credit score.

Let’s take a look at the made up example scorecard below and the associated scores for Jane and Bob.  The information highlighted in blue represents the points assigned for each credit question based on information reported in their credit reports:

After the score is calculated, score reason codes are generated along with the score – both of which are provided to the lender who requested the credit report. If the lender denies the request for credit, they will often incorporate these reason codes into the adverse action letter they are obligated to provide to you in order to help explain why the credit request was denied.  These reason codes are also frequently included within the score explanation section when you purchase access to your personal credit report and score.

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These reason codes indicate the main reasons why your credit score was not higher and are returned with the score in order of importance–with the first code indicating where the consumer lost the most points, or the primary reason why the score wasn’t higher, the second being the secondary reason, and so on.

Now, let’s calculate the top reasons why Bob’s score wasn’t higher.  We do this by simply subtracting the total number of points Bob received from the maximum number of points available for each “question” in the scorecard:

These are then sorted in order of impact of where the greatest number of points were lost.  For Bob, the following credit score and score reason codes would be returned as:

Bob’s Credit Score = 50

Top reasons why Bob’s score was not higher:

  • Time since most recent missed payment too recent
  • Too many new accounts recently opened
  • Too many accounts with a balance

With this information, Bob is able to understand what credit behaviors had the most substantial impact on his score and where he needs to currently focus his efforts in order to improve his score.

[Related Article: The Politics of the Credit Score]

Up to four reason codes are returned with each score generated by the credit reporting agency.  In some cases, a fifth reason code is provided, but only if the # of credit inquiries is a factor that affected your score—but was not already in the top four reasons.  Even people with really high scores—say a 790 or higher—may return reason codes with their score. This simply represents areas where the high scoring person just missed earning the maximum number of points available for that particular data element.

Now that we’ve determined Bob’s reason codes, how many reason codes would Jane’s score produce? Know the answer?  Share them in the comments section below.

Image by Stewf, via Flickr

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  • Christopher

    This article doesn’t make much sense. Why would someone be penalized more if their late payments were older? The chart shows a late payment in the last year gives you 25 points, but it if was 3-7 years old you only get 5. Also, Bob’s credit score is initially listed as 50, but it later is shown as 115.

  • Credit.com

    We were testing to see if anyone would catch that. (j/k) Actually, we’d like to thank you for catching the discrepancy. When we created the chart, we inadvertently transposed the 1 year and the 3-7 year points. We’ve corrected the chart to reflect the actual scale that Tom intended. And for the record, you’re right on the money — a late payment point penalty would be much higher at the 1 year mark than it would be at the 3-7 year mark. Nice catch!

    Thanks again, Christopher!

  • Howell

    I just checked my scores the high one was 761 then I filled out a credit app for a condo the bank pulled my scores and came up with the highest at 716 and the next score at 686 why the big difference long standing credit no lates only about 38% of my credit used I have 3 tax leins that have been cleared 8 months ago #2? how do I get 3 off my report without wating 7 years

  • Richard Harris

    I applied for a credit card through my credit union & they approved it. They sent me a letter “Your Credit Score and Understanding Your Credit Score” They got the score from Experian, which was just under 690 & under the subheading was “Key factors that adversely affected your credit score”. They listed 4 entries, (1) Proportion of balance to credit limit is too high on revolving account. (2) Too many recent inquiries in the last 12 months. (3) Too many consumer finance company accounts. (4) Lack of recent bank revolving accounts. On factor #3. my question is what formula is used to determine this entry, does the formula lump all accounts into one regardless if they are paid off or not? Does their formula differentitate between open & closed accounts? The Experian credit report that I received dated 01/03/2012, list all but 5 accounts as ACCOUNTS IN GOOD STANDING. So, if the 20 closed accounts PAIDCLOSED/NEVERLATE, are too many how can they be classified as accounts in good standing? Currently I have 5 open accounts 1. Mortgage 2. Car loan 3. Personel loan, 4&5 Credit cards. These 5 accounts are in good standing & paid on time with no late payments. I have 20 closed accounts, 19 closed accounts marked on the credit report as PAIDCLOSEDNEVERLATE. & 1 account marked as CLOSED AT CONSUMERS REQUEST. Also for your information I submit to you the following: delinquent accounts:0, derogatory accounts:0 & public records:0. Reference factor & 4, I have no idea what this means or how it impacts my credit score. Can you tell me how I can challage factors 3 & 4? What allows Experian to put remarks like the ones I have mentioned, to the creditor & then in turn to me, without further explanation? What recourse do I have? I can’t afford a lawyer, so I am sending this message to you in hopes that you can help me. Thanking you in advance.

    • http://www.credit.com Barry Paperno

      I agree those reason codes that are returned with the FICO scores are pretty cryptic. Unfortunately, we’re not able to provide those reason codes with your Credit.com score, since they’re not FICO scores (which your lender is using, so be aware of the differences). And since I’m not aware of any good “translations” out there, so I’ll do my best to interpret for you:
      • #3 – Too many consumer finance company accounts: these are personal installment-type loans made by a “consumer finance company,” and often result from financing furniture, appliances, etc. through a 3rd party financing company. Such lenders often lend to people with less-than-stellar credit, and as such, FICO’s research into consumer behavior found that people with these accounts on their credit reports tend to be more likely to default on at least one credit obligation than those who don’t. Specifically, this reason means that any number of consumer finance company accounts – even just one! – can be “too many” to receive the most possible points for the score factor(s) that considers “consumer finance accounts.” And, it doesn’t matter if the loan is open or closed, only that it’s on your credit report. The good news, however, is that this factor carries very little weight in your score. So, while I would recommend not using one of these lenders unless you really have to, I also wouldn’t worry about the effect this factor is having on your score, especially since there’s nothing you can do about it — other than continue paying on time (if it hasn’t been paid off already). The first reason listed should be your #1 concern.
      • #4 – Lack of recent bank revolving accounts. The idea here is the scoring formula wants to see that you use credit cards, which is much better than NOT using them, and that you do so responsibly. This reason code is listed here to point out that you don’t have any “recent” experience with credit cards, as shown by the lack of revolving (credit cards) accounts reporting balances. (It also could mean that you bought something and paid it off before your statement date) Apparently, according to #1, you must have some non-bankcard revolving accounts (retail?) that are at or close to their limits? I’m just guessing, since I can’t see your credit report, but you have some kind of revolving debt, even if no credit card balances. In addition to paying down some of those revolving balances, you can probably help your score by using at least one of your bankcards each month and paying it off by the next due date. This will cause a balance to show, and demonstrates activity, while showing the scoring formula you are able to use bankcards “responsibly.”.

      Let us know if you need any more help understanding these reason codes or if you have any other questions. (I know this stuff sounds crazy, but….) Good luck!

  • Richard Harris

    I went to credit.com & received a print-out of my score & overall ratings. The score was still under 690 and the ratings were A+payment history, C- debt usage, A credit age, A account mix, D inquiries, but I did not find credit score reason codes & what they mean. Could one of your credit or finance gurus help me out & tell me where I can get these credit score reason codes that Experian uses? I am trying to challage the Experian as to why they use partial sentences(without further explanation) when they report back to my creditor with “factors” that are not understandable, as in “Lack of recent bank revolving information: or “Too many consumer finance company accounts:. In order to better manage my credit, it is really hard to do when Experian puts half statements to my creditor that only they understand what it means. I believe that Experian should explain to me, in detail, what these coded half sentences mean. What do I have to do to get this information?

    • http://www.credit.com Barry Paperno

      While your request for these reason codes certainly sounds reasonable, they’re only delivered with FICO credit scores. The score you received from Credit.com is a Scorex Plus score, not a FICO. And since Experian doesn’t make it’s FICO scores available to consumers, you’re going to be out of luck trying to get your Experian FICO score or reason codes. The ones you saw must have been provided by your broker/lender? Hopefully, my reply above will help understand the reason codes you received. Let us know if you have any more questions.

  • http://BarryPaperno Richard Harris

    Thank you so much for your answer, it really did help me to understand what the credit bureau does & how they operate. My two credit cards are just issued cards, so they really no payment history, except for the first two months. My plan to correct the remarks is to make a purchase each month & send in a larger payment than requested on the two credit cards, & not to request any inquiries for a year. At the end of the year, June 2013, the remark “Too many recent inquiries in the last 12 months, should be gone, as well as the remark”Lack of recent bank revolving information”, because I will have made purchases & payments on both credit cards. This will hopefully eliminate remark #1 and at the end of one year, also raise my credit score. Thanking you again for helping me out in this matter.

    • http://www.credit.com Barry Paperno

      Charging occasionally on the two cards, making larger than minimum payments – or ideally the entire balances – and refraining from applying for new credit, which will prevent any new inquiries, is a great plan! Best of luck!

  • Bernice Hagan

    My credit score is great except it had one area as C because I take a lot of card offers. I get free nights, gift cards, miles, etc. Now I would like to get rid of the cards that are not the best. I don’t think I care about my credit for awhile since I am retired, have bought a car recently- have no big purchases in mind. People say it hurts to cancel these. Should I? I have two which will charge an annual fee soon so I don’t want these anymore.

  • Harry Tolle

    The posted comments and replies have helped me a lot. I have just started trying to get Experian to explain their adverse comments on a credit report they provided to a mortgage company. My score was over 800 but the comments made me sound like a serious credit risk. When I talked to them they tried to blame the printed comments on the mortgage company caliming that Experian did not provide them. There does not seem to be any regulatory agency that can hold them responsible for what are obviously derogatory and damaging comments.

    • Credit.com

      Harry – The reason codes (or adverse comments) were generated by the credit scoring model the lender used. Since it was a mortgage, I’m going to assume it was a FICO score. Prior to 2001, when FICO first released their credit scores to the public, they were only provided to lenders. And to help lenders understand the main factors behind the score, the scoring models generated these reason codes or score factors to help the lender pinpoint why the score wasn’t higher (it also helped the lender explain to the consumer why the score wasn’t higher.) Here’s the thing, because your score is SO hight (an 800 FICO score is like the best of the best) — these codes won’t make sense or mean anything whatsoever to you. This is because all scores are designed to return “reason codes” that explain where the consumer lost points in the scoring model. These reason codes or score factors are more helpful to consumers with lower scores. However, because the model is designed to return these factors– no matter how high the score, they really don’t carry much weight with folks that score as high as you do. This is why they don’t make sense to you. Even though you think the reason codes made you sound like a serious credit risk, your lender probably told you that your credit was excellent — the fact that you had an 800 was golden.

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