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How to Decode Your Credit Score

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A common complaint about credit scores is that they are a “black box” containing a set of mysterious secret formulas that can confuse even the most savvy of consumers.

While there are many ways in which trying to understand credit scores can be frustrating to consumers, for high scorers eyeing that elusive perfect score, part of the confusion often comes in the form of those seemingly “meaningless” reason codes that accompany almost all credit scores, good or bad.

By meaningless reason codes, I’m talking about the comments that accompany high (over 760 FICO) credit scores, with such descriptions as “no recent bankcard balance information,” “too many bankcard charge accounts,” “lack of recent installment loan information,” and other messages that tend to make someone who is effectively managing their credit feel like they should be doing more.

As a high-scoring Credit.com reader recently asked us, ”I feel like I am penalized for owning my home and not being in debt. Where’s the logic in that?”

This is a good question, to which a logical response would be that these reason codes represent the scoring factors with the greatest difference between the number of points possible and the number of points achieved. In other words, these are the areas of the score where you “lost” the most points.

Reason codes can be valuable to consumers with scores in the lower-to-middle scoring ranges, as they point out the areas needing the most improvement, mostly within the payment history and amounts owed categories that together make up almost two-thirds of a FICO score.

For high-scoring consumers, who by definition have already been paying on time and keeping balances low — practices everyone should follow — reason codes tend to focus on the less important scoring factors that can help distinguish one high-scoring consumer from another to a lender, but that doesn’t make much sense to someone simply trying to do what it takes to raise an already good score.

[Related Article: 4 Ways Time Can Help Your Credit Score]

To illustrate, let’s take a look at some of these low-impact reason codes that tend to appear with high scores, and what might happen if you attempt to act on them:

  • No recent bankcard balance information. This usually means there are no credit card accounts with balances on the credit report. To remedy this situation, you may be tempted to stop paying your balances in full each month, and instead make only minimum payments. However, doing so is more likely to have the opposite effect of dropping your score and replacing that reason code with one such as “amount owed on revolving balances is too high.”

  • Too many bankcard charge accounts. This one sounds pretty straightforward, but there’s a catch. Notice how this reason code doesn’t say there are too many “open” cards — just that there are too many cards on the report? People often interpret this reason code as “too many open bankcard charge accounts” and close one or more cards, not realizing that by doing so they raise the risk of higher credit utilization (balance/limit ratio) and a lower score, accompanied by the reason code, “proportion of balances to credit limits on revolving/charge accounts is too high.”

  • Lack of recent installment loan information. This code is similar to the first one above, with loans replacing credit cards. Taking out a new loan to satisfy this reason code is more likely to be counterproductive by lowering your score and telling you via the reason codes that your “ratio of loan balances to loan amounts is too high” and you have “too many accounts recently opened.”

So if these meaningless reason codes are starting to make some of you high scorers feel like you can’t win for losing, remind yourself that a 760 FICO score is likely to qualify you for the same credit terms that a perfect score will, and go back to managing your credit as you’ve been doing all along. And if you’d like to get a better understanding of which credit score components you should be working on, get your free Credit Report Card from Credit.com or pull a free credit report once a year from each of the credit bureaus at AnnualCreditReport.com.

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