What are “Score Factors”

Score factors, which are also known as “reason codes”, describe the reasons your score was not higher. Since credit scores’ “secret sauces” are not divulged by the developer, score factors help to explain the score.  That way the company can explain it enough and not give away the confidential details of the score. When you or a credit grantor receives your credit score, it is accompanied with up to five score factors. The factors are delivered in the order of importance.

One of the factors is the number of credit inquiries in the past 12 months, which occurs when you apply for credit. This factor is required by law, even though it may not have had a major impact on your score.  If it is listed as the last reason, it probably was not of major importance.

Credit scores

To refresh your memory, credit scores are based on information from your credit report and are used to predict future credit behavior.  For most scoring models, high scores are the best and reflect that you are a lower risk to default on your loans. The scores are usually three digits.

When you request your score, you usually receive a detailed explanation of the five score factors or reasons and how they impacted your score.  In addition, it usually includes suggestions on how to improve your score.  The same detailed information is not provided to the lender.

Lender use of score factors

When a lender requests your score, they receive a short version of the score factor explanation, which is usually less than ten words and designated by two digits.  They use this information to understand the reason you received that score.  For example, “Amount owed on accounts is too high”.  This means that you owe too much on your credit accounts, such as credit cards and non-mortgage accounts.  The more you owe, the greater the risk you are to lenders.  Lenders also use the score factors in the declination letters that explain why you were denied a credit card or loan.

Score factors not only summarize your score, but are also useful in determining how to improve your score.  What is the use of a three digit score if you don’t know what it means and the scale? A score of 700 out of 950 is not the same as a score of 700 out of 850.

Credit Reporting Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, founder of www.creditexpertwitness.com and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.