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Why Your Credit Score Is So Bad

Barry Paperno

A Credit.com reader named Roger recently took me to task for my blog post, How to Decode Your Credit Score, that focused only on high credit scores and neglected some of the common reason codes that accompany lower credit scores:

What about reason codes: Serious delinquency and or public record or collection filed. Time since delinquency too short, or my favorite Number of delinquent accounts. OH Yeah, we are talking about how to decode your extremely high credit score…. I forgot.

My apologies go out to Roger and others who have some negatives on their credit report, as the reason codes they receive are just as important and can be just as confusing as the codes that come with the higher scores.

Reason codes, aka score factors, are provided to consumers along with their credit scores, and indicate up to five of the scoring calculations having the most negative impact on a score. These are the top reasons why a score is not higher, listed in order of importance. For example, if your first two reason codes indicate, in order, “serious delinquency” and “time since delinquency is too recent,” you’ll know that a seriously late payment is hurting your score more than any other factor, with the fact that it occurred recently also having a negative impact.

For consumers looking to rebuild their credit scores, the following explanations apply to some of the most common score factors for scores under 700:

1. Serious delinquency. A “serious” delinquency refers to either a recent 60-day late payment or any payment 90 or more days past due. Less intuitively, however, this designation can also refer to an account reported with a “settled for less than the full amount due” status, resulting from a debt settlement or short sale, and accounts reported with the description “partial payments are being accepted,” indicating a special payment arrangement between the consumer and lender, including some early-stage mortgage modifications.

2. Serious delinquency and public record or collection filed. This reason code appears when a serious delinquency is accompanied by a third-party collection agency debt or public record item, such as a judgment, tax lien or bankruptcy. A collection item of this sort can represent anything from unpaid credit card debt to a medical bill to a parking ticket.

3. Time since delinquency is too recent. When the credit score considers late payments of 30 days or more, or any “serious delinquency,” the length of time since the most recent incident is an important factor, resulting in additional damage to the score if occurring within a recent timeframe.

4. Number of accounts with delinquency. In addition to the recency of negative items weighing heavily on a credit score, simply the number of accounts having late payments of 30 days or more can further depress the score, as multiple accounts with a history of late payments indicate higher risk.

5. Proportion (or ratio) of balances to credit limits on revolving accounts is too high. Translated, this reason code refers to “credit utilization” (balance/limit ratio), which measures the amount of available revolving credit being used. This factor makes up almost 30% of the score, with the higher the utilization percentage, the lower the score.

Again, by identifying the top reasons why your score is not higher, reason codes provide some of the most useful credit scoring information available to consumers — both high and low scoring — and come free with any credit score. You can also use a tool like the free Credit Report Card to see which major components of your credit profile are pulling down your score.

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