A Roadmap to Better Credit Scores

I’m often asked about the best ways to improve a consumer’s credit scores. Is it by paying bills on time or is it better to pay off credit card debt? Or, is it by avoiding any new, unnecessary credit? The answer, of course, is that all of those factors are important to achieving and maintaining a good credit score. But, apart from the basics, how to improve a credit score is going to vary from consumer to consumer. There is no single universal path from your current credit score to a high credit score because few consumers’ credit reports are identical. There is, however, a tool that will best identify your path: the reason code.

Reason codes are most often delivered along with credit scores when they’re provided by the credit reporting companies (CRCs). These codes identify the top reasons why your credit score wasn’t higher. After all, what better way to improve your credit scores than by addressing the most significant reasons why they’re not higher in the first place?

Some examples of common reason codes would be:

“Balances on bankcard or revolving accounts too high compared to credit limits”
“The total of all balances on your open accounts is too high”
“There is a bankruptcy on your credit report”
“Your most recently opened account is too new”

The Key to Better Credit

Thanks to recent amendments to the Fair Credit Reporting Act and a new requirement called the “Risk Based Pricing Rule,” your credit scores and reason codes are now more accessible than ever, especially if you’ve applied for a mortgage loan or if you’ve been denied credit.

For example, if you apply for a mortgage loan, the lender must send you a form called a “Credit Score Disclosure Notice.” This notice is required to include your credit score and at least your top four reason codes, which are often referred to as “key factors adversely affecting your credit scores.” This must be sent to you proactively, meaning you don’t have to request it from the lender.

If you apply for any other form of credit and your application is denied because of a credit score, the lender is required to send you a declination letter or, more formally, a “notice of adverse action.” Adverse action notice letters were required before, but those letters must now also include your credit score and at least your top four reason codes. And, again, this letter must be sent to you proactively.

So if you applied for a credit card and you were denied because your VantageScore credit score was 580, the credit card issuer would be obligated to send you a declination letter telling you that your score was 580. That letter would also have to include the top four reasons your credit score wasn’t higher (aka your reason codes).

A Game Plan for Your Credit

Reason codes are presented in order of importance. In other words, the one or two reason codes at the top of the list are having the greatest impact on your credit scores. And another thing to keep in mind is that consumers with good credit scores may also receive 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 (VantageScore 3.0 is scaled from 300 to 850).

If your score wasn’t higher because of excessive credit card debt, then you know paying down your debt is high on your priority list. If your score wasn’t higher because you recently opened a new account, then waiting to apply for credit again is prudent. If your score wasn’t higher because you have too many accounts with balances, then paying off a few of them will deliver credit score dividends over time.

The reason codes have dual purpose. Lenders primarily use them as a way to communicate to consumers why their scores aren’t higher and to also comply with their disclosure requirements. But now that the information is readily available to consumers, we can use it as a way to game-plan our score improvement strategies.

Understanding Reason Codes

One of the challenges associated with reason codes is that they are very short because of limitations in the number of characters that can be used in lenders’ systems. They are sort of like a tweet. Another challenge is that reason codes tend to be awfully complicated and full of industry jargon, though there are translation options. (If you’d like to take a look at all the reason codes, you can do so at ReasonCode.org, a site we set up so people could look up the reason codes they are given, and see English and Spanish translations of them that are easy to understand. It’s important to remember that this site will only work for VantageScore reason codes and not any other credit scoring model.)

Reason codes are developed with the needs of consumers in mind. Take advantage of them and practice prudent credit habits, and your credit score will improve, because keep in mind: you are in charge of your credit score. It is affected by how you handle your credit and the reason codes can help you understand how to manage your credit responsibly.

[Editor’s Note: If you want to get a better handle on where your credit currently stands, you can check out your VantageScore and a breakdown of how your credit compares to other Americans using the free Credit Report Card.]