What Is a Reason Code? (Hint: It Unlocks the Secrets of Your Credit Score)

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When we first moved to San Francisco several years ago, my husband and I decided to try a temporary corporate apartment until we had time to get to know the city. I still remember sitting in the leasing office and waiting to see if we were going to get approved. My husband already had a job but I was still looking, so we knew our chances would be slim in comparison to other applicants.

Then the leasing agent let out a whistle and said, “Heyyyy you two want to buy me a car or anything? Yeah…. you’re approved.” We high fived and played on her sense of humor to see if she’d show us our credit scores. After a few seconds of deliberation she turned her monitor around so we could see and then quickly snapped it back before she got caught showing us our scores.

That was the first time I’d ever seen my credit score. In those days it felt like anyone who could see your score had some magical power over you – as if they understood your financial situation even better than you did. And they held the power to approve or deny you for reasons unbeknownst to you.

Thankfully, that’s now beginning to change as credit scores become more available. But that doesn’t mean there isn’t still a good deal of mystery shrouded around the ever elusive score. That’s what we’re on a mission to change.

If you’re a ReadyForZero PLUS Credit user, you may have noticed a little something new when logging in and viewing your progress page: your credit score factors. These are the factors that are calculated into the score we show you (Experian’s VantageScore 3). Next to those factors are something called “reason codes”. The reason codes unlock the mystery behind your score so you can finally see what to work on to improve your score.

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What is a Reason Code

The reason code is essentially the reason your score is not at the very, very top of the VantageScore range. (Keep in mind that everyone has multiple credit scores and that there is no such thing as the perfect credit score.) This is helpful because it tells you what you need to do if you want to improve your score.

To see what exactly your reason code stands for and what to do about it, view the website ReasonCode.org. This website also explains in more detail what the reason code is:

“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.” — ReasonCode.org

In other words, the reason code is the explanation behind your score – and even the highest of credit scores will have reason codes listed. When viewing your reason codes, make special note of what’s right on top as that’ll be the most significant factor playing into your score.

A Few Factors That Typically Play Into Your Credit Score

There’s nothing simple about credit scoring but there are factors that can play into most everyone’s scores. These factors include things like the length of credit history, your credit utilization rate, your payment history, and more. In other words, if you have mostly new accounts, the accounts are nearly maxed out, and/or you’ve made late payments, you’re going to have a lower score.

There are many other factors that play into your score – but the best way to know what exactly you should look out for is to look at your score and your reason codes. That way you’ll have truly personalized directions as to what to work on. In the meantime, there’s one thing that you definitely won’t have to do to improve your score: carry a balance from month to month.

There is a common myth that carrying a balance will improve your score, but that couldn’t be further from the truth. In fact, carrying a balance increases your credit utilization ratio. In other words, not only does carrying a balance not help your credit score, it could actually hurt your score. So if you are looking to build your credit, then you should pay off your balances each month on any debt account you can. And if you’re looking to build credit while in debt, keep making those payments on time and keeping paid off accounts open. This will allow you to slowly increase your score as you decrease your debt.

Thanks to the fact that credit scores and the reasons behind them are becoming more available to us, I no longer have to go into a leasing office blind. In fact, when I recently moved back to New York from San Francisco, I went into leasing offices knowing just what kind of score I was offering up. A way more empowered approach to apartment shopping than before! Here’s to more transparency in the financial industry – a transparency that you too can benefit from if you take the time to find out your score and the reasons behind it!

Image Credit: Jeremy Brooks

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