Denied credit, but not sure why? Join the club.
By law, lenders are required to send you a free copy of your credit score if they reject your application. They must also send you a complimentary copy if your application for credit was approved, but you were offered something with less than their best terms. That way, you can get a better idea of what a lender was thinking when it judged your application.
The problem is it’s often hard to tell what exactly is affecting your credit score. Along with the free score that lenders are supposed to send you, you should also receive a brief summary or “reason code” that, in theory, explains why your credit score is low. But for many loan applicants, the codes they receive are so cryptic and jargon-heavy that they’re nearly as bewildering as the scores themselves.
For example, if you’re close to maxing out your credit cards (which is a definite credit score no-no), you might see the following strangely worded gem stamped to your credit score disclosure: “Total of balances on accounts never late is too high compared to loan amounts.”
Or, if you recently declared bankruptcy, you may receive a fragment that sounds more prophetic than descriptive: “Too many accounts with a bankrupt status.”
Similarly, if you’re 30-days late on a mortgage, but current on everything else, you could see this jargon-heavy mouthful on your statement: “A delinquent or derogatory item is the worst status on your real estate accounts in recent months.” (Huh?)
VantageScore to the rescue
The credit score company VantageScore feels your pain. In order to help clear up some of the confusion, the credit score provider created a free online tool that consumers can use to help demystify their credit score’s reason codes.
VantageScore launched the tool early last year when it introduced a revamped version of its credit score, VantageScore 3.0. In January 2014, it expanded the site, dubbed ReasonCode.org, and added a video that explains reason codes in more depth. In addition, VantageScore introduced a brand-new Spanish-language version: esp.ReasonCode.org.
“Score disclosure notices and the requirement to include reason codes are meant to empower consumers to better understand their credit profiles,” said VantageScore CEO Barrett Burns in a Jan. 22 press release. “However, for too long the language has been plagued with industry-speak and space limitations.” VantageScore’s free online tool is intended to help translate some of that industry-speak and provide “deeper explanations,” said Burns.
The free online tool works like this: Go to ReasonCode.org and type in the reason code’s two-digit number or “descriptive” sentence into the tool’s search engine. Then scroll down and click on the sentence that’s closest to the reason code you received. The website will then take you to a paragraph that succinctly explains “in plain English” what that reason code means.
Not surprisingly, VantageScore’s tool is primarily designed for VantageScore reason codes. So you won’t see an exact match if your lender uses a different type of credit score. According to the site’s Frequently Asked Questions, the codes that appear on the search engine’s scroll down menu are among the most common VantageScore reason codes consumers receive.
But as the Los Angeles Times’ Lew Sichelman notes, if you’re working with another type of credit score, such as a FICO score, you can still use the online tool. Just type in some keywords from the reason code you received and pick the closest match.
In addition to a one-paragraph explanation of what your reason code means, ReasonCode.org also provides some vague but helpful tips for improving your score.
For example, if you’ve opened several accounts in a short time period, VantageScore advises: “Use your existing credit responsibly and make your payments on time.” Also: “Manage your credit wisely by planning ahead for your credit needs and avoid applying for more credit than you need.”
Or if your credit limits are too low, VantageScore advises: “Use credit responsibly and always make payments on time with your existing accounts. After a period of successfully managing your accounts, you can seek increases to your credit limit.”
If these sound like fortune-cookie aphorisms, there’s a reason: ReasonCode doesn’t know your particular credit situation, so it can give you only generic advice. To get a complete picture of your credit situation, pull a copy of your credit report — which is available for free from each of the three credit bureaus once per year — and examine the accounts listed.
To get a free copy of one of your three annual credit reports, visit annualcreditreport.com. If you need additional advice about what to do next, you may also want to enlist the help of a credit counselor who can tailor his or her advice to your specific needs. You can find a credit counselor in your area by typing in your ZIP code on the National Foundation for Credit Counseling’s member agency locator and scrolling through the results.