Credit scoring is the process whereby a credit scoring model distills the information on your credit report into a 3-digit number. That number is used by lenders, tenant-screening companies and utility providers to assess the risk of doing business with you. The higher your score, the less risky you are to do business with, and the more likely you’ll be approved with competitive rates and terms.
When many people think about credit scoring, they focus almost exclusively on the actual number. But almost any time a consumer receives a credit score, those three digits are accompanied by something else: reason codes. Reason codes, also referred to as score factors, describe the top reasons why your score wasn’t higher. Lenders receive reason codes from the credit bureaus whenever they obtain credit scores, and the reason codes typically appear in any notification consumers receive when they get their credit scores.
Reason codes are always generated when your score is calculated. They are sent to lenders to help them comply with their requirement under Federal law to give you the relevant elements or reasons that adversely affect your credit score. These reason codes are copied into letters, which are then sent to applicants who were either not approved or were offered terms less than the most favorable terms from that lender. Bear in mind that the lender could have denied you or offered higher rates for reasons other than your credit score — for example length of employment being short or debt-to-income ratios too high. Lenders have many other requirements for approving a loan beyond your credit score. So, regardless of the reason that a lender might have decided to deny you or offer you higher rates, you’ll still receive your credit score and reason codes.
Reason codes are extremely helpful to consumers who don’t have high scores because they take the guesswork out of figuring out why their scores aren’t higher. In fact, reason codes are very much a road map to the behaviors these consumers must address in order to improve their credit scores. But reason codes are not reserved only for denial letters, and people with low scores are not the only ones who receive them. Reason codes are typically included when you buy your own score, obtain it free from a website or other source, or receive notification from a lender that a score was used in a lending decision. That means even consumers who have extremely high scores receive negative reason codes.
Credit scoring models will always provide reason codes unless you have an absolutely perfect score, which very few people do. So if you have a VantageScore credit score of 825, which is 25 points from the perfect 850, then the VantageScore credit scoring model is going to tell you in the form of a reason code why you didn’t earn those final 25 points.
As you can imagine, consumers with very high scores might be confused when they see reason code language like, “Your most recently opened account is too new” or “You have too many inquiries on your credit report” — right next to an 825 score. If you are one of those consumers, it’s helpful to keep in mind that reason codes are not there to explain why your scores are low, but are there to explain why they aren’t higher.
It may also be helpful to consider that, with credit scores, there’s not much practical difference between a near-perfect score and a perfect one — and trying to eke out a few extra points on your score by manipulating your payment behaviors, card balances, or available credit lines could backfire and cause unwanted score fluctuations.
The simple truth is this: If you have a VantageScore credit score above 780, you are already considered among the best-of-the-best loan candidates. It’s highly unlikely that raising an 825 score to 850 will get you a better interest rate, because your elite credit score probably merits the best deal any lender has to offer.
If you’re one of these top-scoring consumers, your best strategy for managing your score is one of maintenance, not improvement. Focus on what you’re doing right rather than what you’re doing wrong. If you have a score above 780, your credit reports are essentially devoid of negative information. You have very low credit card balances relative to your credit limits. You probably have many years of credit experience reflected on your credit files. You have a history of paying your bills on time. And, you aren’t excessive in your applications for credit. Keep doing those things and your already-impressive credit scores will continue being impressive.