Reason Codes 101

If you’re like most people, when you’re informed of your credit score, your focus is on the 3 digits of that score. That’s understandable, because a lender is going to use that score to help determine whether or not to do business with you, and under what terms. But, the documents you receive with your credit score actually contain much more than just those three digits.
There are many ways you can obtain a credit score:

Buy it yourself
Get one free from any of several websites that offer them
Receive it in a disclosure notice after applying for credit

No matter where you get your score, the documents that accompany it will include up to four or five statements explaining why your score wasn’t higher. These statements are called reason codes and sometimes go by several other names. Some people call them score factors, others call them adverse action codes. They’re all the same thing.

The next time you see your credit score, regardless of where it comes from, look for the Reason Codes. They’ll be worded and displayed something like this:

Your Credit Score is: 705

  • 32:
    Balances on bankcard or revolving accounts too high compared to credit limits
  • 16:
    The total of all balances on your open accounts is too high
  • 85:
    You have too many inquiries on your credit report
  • 13:
    Your most recently opened account is too new

The numbers preceding each statement are numeric identifiers; sometimes they appear with the text, and sometimes they do not.

The four (or five) factors are listed in order of the impact they have. In this example, the number-one reason the credit score is not higher is, “Balances on bankcard or revolving accounts too high compared to credit limits.” That means the consumer’s credit card debt is too high relative to their credit limits.

In our example, the reason with the second-greatest impact is “The total of all balances on your open accounts is too high.” That means the consumer is carrying too much debt on their open accounts.

The number three reason the score isn’t higher is, “You have too many inquiries on your credit report.” This means the consumer has recently applied for credit several times, which led to some number of credit inquiries.

The number four reason the score isn’t higher is “Your most recently opened account is too new.” Clearly this means the consumer has a very new account on their credit report.

Reason Codes and High Credit Scores

Even if you have a high credit score, you’ll still get reason codes. That’s because reason codes are included to show why your scores weren’t higher—no matter the starting point.

For example, if you had a VantageScore credit score of 827, nobody would rightfully call that a “low score” as it’s only 23 points from the top of the range (NOTE: VantageScore 3.0 and VantageScore 4.0 is scaled from 300 to 850). Any score short of 850 is going to have reasons why it wasn’t even higher.

Here’s why: A lender is required by Federal law to provide a consumer with a disclosure notice if their credit report data is used in the review of a loan application and the application is either denied, or the application is approved but with less than the best terms offered. And, some lenders may voluntarily provide the disclosure notice to all customers even if the application was approved at the best terms.

The disclosure notice contains both your score and the reason codes explaining why your score isn’t higher, and usually arrives in the form of a letter. It also indicates which credit reporting company (CRC) – the three national CRCs are Equifax, Experian and TransUnion – supplied your score to the lender.

By definition, a high credit score doesn’t have a lot of significant factors pushing it down. Sometimes, filling out the requirement of including four or five factors means some reasons that aren’t very significant end up on the list. In general, if reason codes seem to conflict, or even contradict each other, the best thing to do is work your way down the list, addressing the most significant factors first.

Who Makes the Decision

A second common mistake made by consumers who receive these letters is thinking that the codes listed in the letter are the reasons a credit application was denied, or why the interest rate being charged isn’t lower. Remember, the reason codes are only an indication of why your score isn’t higher, not why your application was denied or why the interest charged isn’t the lender’s best rate.

One thing to keep in mind is that the CRCs do not make any decision about your application on behalf of the lender. The decision to accept or deny your application is made solely by the lender, as is the determination of what interest rate to charge on each loan. The obligation to send the disclosure notice, with reason codes, is the lender’s, as well.

It’s also worth noting that a credit score is seldom, if ever, the sole determiner of a lender’s decision on whether to extend credit, and at what terms. Lenders also consider information such as your income, employment status, the amount of down payment you’re prepared to make, and the value of the purchase you wish to finance – all factors outside the scope of a credit score.

Improving your credit score can increase your chances of getting a loan, or a favorable interest rate.

Blueprint for Better Scores

Reason codes can be very helpful as a roadmap to score improvement. They paint a very clear picture of the top reasons why your score isn’t higher. This takes the guesswork out of your score improvement strategy.

For example, the recipient of the 705 score in the example above would know the most effective step to increasing his or her score would be to pay down his or her credit card balances, because high balances are the number one reason why the score isn’t higher. Paying off some accounts altogether would also help, by addressing the second most important score-lowering factor, a surplus of account balances. (The third and fourth most significant reasons both refer to recent activities that can only be remedied by keeping accounts in good order and allowing more time to pass.) is your resource to take advantage of the information contained in the reason codes you receive. Type the code statements or numbers into the search tool, and you’ll find more information on the factors that affect your score, and tips for reversing the effect of negative factors. Used wisely, it can help you become a better manager of your credit and a more informed credit manager.