Credit Scores 101

Your credit score is a powerful three-digit number that plays a huge role in almost every aspect of your financial life. If your credit score is high, you will be rewarded with the best interest rates and terms on everything from credit cards to auto loans and mortgage loans –and save a ton of money on financing, which helps to better leverage your money for the long-term. On the other hand, if your score is low, it’ll be much more difficult to get approved for credit products and when you do, you’ll pay a lot more for the loan.

But knowing your credit score is only a small part of the equation. To truly understand what your credit score means and why it’s not higher, you have to look at the factors behind the score – otherwise, it’s just a number.

Every credit score is returned with reasons or “score factors” that explain why the score wasn’t higher. These score factors, sometimes called “reason codes”, help pinpoint the areas where you lost the most points in the score calculation and are returned in the order of most importance. For example, the first code or reason, will tell you were you lost the most points in the score calculation, the second reason code will tell you where you lost the second to most points, and so on.

Reason codes will very depending on the individual and the unique information contained in the user’s credit report. It’s important to understand that just because two people have the same score doesn’t mean that both would take the same steps to improve their scores. Only the reason codes will tell you which areas to focus on in order to improve your score.

To illustrate the differences, let’s take a look at an example of two users who have the same score and why it’s important to focus on the reason codes behind the score instead of just the number.

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Joe and Mary both have scores of 650, but for very different reasons. Joe has a score of 650 and his top returned reason code or score factor shows that he has a derogatory account that went delinquent in the last 6 months. Mary also has a score of 650 but her top reason code shows that her revolving utilization is too high.  Although Joe and Mary have identical scores, both would take very different approaches to improving their credit scores. This is why paying close attention to the reason codes/score factors are important—especially when you’re looking to focus on improving your credit scores.

If you’re looking for a credit score improvement plan, your reason codes are all you need to help you pinpoint where you need to focus. The next time you order your credit scores, instead of focusing solely on the number itself , pay close attention to the score factors – especially if your score is lower and you’re looking for ways to improve.