It hurts when you've been rejected for a mortgage.
Of course, there are many reasons you can be turned down. You may not have been employed long enough in your current job, for example, or you may not make enough money for the property you want to buy.
But if you are spurned because of a low credit score, the pain of rejection is sometimes made worse by the reason your score didn't make the grade.
Actually, lenders don't give you a reason, per se. Rather, you receive what's called a "reason code:" a two-character numeric code and a terse, industry-speak statement -- for example, "01 Amount owed on accounts is too high" -- as to why your credit score isn't higher.
Sometimes you are given two, three or even four reason codes. But even if you get just one, you're left scratching your head, wondering what in the devil the lender is talking about.
A new tool from scoring model VantageScore may help. VantageScore is a rival to FICO, the company that created the algorithms used by the major credit reporting agencies. It is meant to empower consumers to better understand their credit profiles and how to improve them.
According to research by VantageScore, even lenders themselves are sometimes baffled by the codes, which are generated by credit reporting agencies. And even if lenders aren't confused by the codes, they are certainly frustrated by the fact that their customers are.
But a new website from VantageScore, ReasonCode.org, offers new insight in plain English (or Spanish) into the meaning of each reason code and perhaps how to fix the problem. It won't help you right away, but it should ease the agony when you reapply for funding.
ReasonCode acts somewhat like a search engine. You can type in a specific reason code that you received from your lender and instantly receive a deeper explanation of the code, plus tips for addressing credit behaviors that negatively impact your credit score.
There are dozens of reason codes or factor codes from the three major credit reporting agencies: Experian, Equifax and TransUnion. FICO has built logarithms for each company based on their specific requirements, so you are likely to see different codes for the same reason when comparing two or more credit scores.
Problem is, the FICO codes don't line up with those from VantageScore. But if you take the time to enter a few key words or phrases from your FICO codes into the ReasonCode search box, you will find a better explanation of what the code might mean. Then, run your cursor over that explanation and you'll see several possible ways to fix the issue.
For example, you might see a reason code 14, or "Length of time accounts have been established." Search the word "time" at ReasonCode, and you get several choices, including one that says, "Time since oldest account opened is too recent."
Click on that statement and you'll get a deeper explanation and a tip on how to avoid the situation the next time. "Don't open more accounts than you actually need," the site advises. "Research shows that new accounts indicate greater risk. Your score will benefit as your accounts get older."
If you get an 05 reason code, "Too many accounts with balances," type the word "balances" and you'll learn "you have bankcard or revolving accounts in your credit file with balances that are high compared to the credit limit on the account, which is a proven indicator of increased risk."
What can you do? "Pay down balances on your accounts and keep them below 30 percent of the total credit limit on that account," ReasonCode suggests. "Over time, this will have a positive impact on your score."
When you receive a credit score, the reason codes will be listed in order of impact, so the first one listed is the most important -- the No. 1 reason your score isn't any higher. The second number corresponds to the second-most important factor in building your score, and so on.
Even if you receive a high score, you'll still see reason codes. Any score less than the top number will see codes as to why the score wasn't higher. Consequently, some codes on the list are not terribly significant.
But for the rest of us, reason codes could be considered a road map to improving our credit scores, if we could understand them.
Remember, the score isn't the sole determinant in whether you will receive funding or the interest rate you will be charged. But it is a key factor, so improving your score can increase your chances.
If you try the exercise outlined above, you'll have a better understanding of why you didn't score any higher and what you can do better the next time.