Jan 10 • General discussion
How your credit is evaluated when applying for loan, credit cards, etc
When you apply for a loan or credit card, lenders review your credit report to assess your creditworthiness. If they determine you pose too much of a risk, they will send you a denial letter explaining their decision. This letter will include the credit bureau they used (Equifax, TransUnion, or Experian) and list the specific risk factor reason codes that contributed to the denial. These codes are presented in order of importance—the higher the code appears on the list, the more it impacted the decision.
In addition to the unique reason codes used by each of the three major credit bureaus, FICO NextGen has introduced an extensive set of codes. There are over 150 FICO reason codes, which are provided to lenders to clarify why a credit score isn’t higher. This helps lenders explain credit denials to applicants and gives consumers insight into what areas need improvement. These codes vary across different FICO models. For example, the NextGen model is not widely used (except by some lenders like PenFed), and many codes are specific to mortgage, auto, or industry-specific credit scoring.
Looking at the codes used in Equifax, Experian, and TransUnion’s classic base scoring models, they generally fall into these categories:
- Derogatory Marks: Late payments, collections, or public records
- Insufficient Credit History: Not enough established or recent credit, whether revolving or installment
- High Balances: Owing too much relative to credit limits
- Too Many New Accounts or Inquiries: Excessive recently opened accounts or credit inquiries
- Too Many Consumer Finance Accounts: Numerous loans from consumer finance companies
It’s also important to recognize what doesn’t impact your score. For instance, not having a store credit card is not a negative factor. While FICO NextGen includes a code for "lack of recent retail account information," this does not imply that opening a store card improves your credit mix. Additionally, inquiries only affect your score for the most recent 12 months, despite common misconceptions. Furthermore, having too many credit cards ("too many bank/national revolving accounts") is a factor for Equifax and Experian but not for TransUnion.
However, understanding the codes alone isn't enough. For example, some consumers report higher credit scores when they have one or two more revolving accounts than installment accounts—a nuance not directly reflected in the codes. FICO broadly explains its scoring model as follows:
- 35% Payment History (on-time payments, delinquencies)
- 30% Amounts Owed (credit utilization)
- 15% Length of Credit History (age of accounts)
- 10% New Credit (recent inquiries and new accounts)
- 10% Credit Mix (variety of credit types)
For industry-specific scores, like mortgages or auto loans, reason codes typically indicate:
- Lack of history with that type of credit
- High balances, recent account openings, or derogatory marks related to that credit type
- Repetitions of the standard base model codes
Understanding these reason codes can help you take the right steps to improve your credit and become more appealing to lenders.
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How your credit is evaluated when applying for loan, credit cards, etc
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