What Are FICO Reason Codes?

Creditors and lenders don’t make money by turning down applicants. But sometimes, consumers don’t pass muster, even if they have reasonably good credit scores. Naturally, if your application is declined, you want to know why. The answers are to be found in the reason codes listed in the Adverse Action Notice announcing the bad news.

The FICO Scoring System

The biggest player by far in the credit scoring market is FICO from the Fair Isaac Company. FICO scores dominate the decision-making process for personal loans, credit cards, and other types of debt. The score ranges from 300 (worst) to 850 (best).

The three major credit reporting agencies (Equifax, TransUnion, and Experian) calculate FICO scores based upon the credit information they collect from creditors and lenders. Because the three CRAs might not have exactly the same data, a consumer’s three credit scores may vary slightly.

When you apply for a loan or credit card, the issuer performs a “hard” inquiry upon your credit history from one or more CRAs. Hard inquiries can reduce a consumer’s credit score by several points, but the impact dissipates after one year. The issuer receives the consumer’s credit score and credit report, which it uses to help render an approve/decline decision.

The FICO Reason Codes

A FICO reason code is a two-digit number that denotes why an applicant was turned down. Typically, when a lender/issuer rejects an application, it sends the consumer an Adverse Action Notice explaining the reasoning behind the negative decision. The notice will usually list up to four or five reason codes to help the consumer understand what happened.

The smart course of action is to use the reason codes to help figure out what corrective steps to take.

The organizing structure for understanding the reason codes is the set of five factors that FICO uses to calculate credit scores:

1. Credit History (35% of total score)
2. Amount of Debt (30%)
3. Length of Credit History (15%)
4. Credit Mix (10%)
5. New Credit (10%)

Each reason code aligns with one of these factors.

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Credit History

Your credit history centers on whether you pay your bills on time. Most issuers won’t report you to a CRA until you are more than 30 days delinquent paying a bill. Your credit score will suffer from delinquencies and from other derogatory items stemming from delinquencies. These include:

• Defaulting on an account, causing the issuer to write it off.
• Turning an account over to a collection agency.
• Declaring bankruptcy.
• Having a lender foreclose on your home.

Thus, the credit history factor deals directly with a consumer’s creditworthiness.

Example Reason Codes for Credit History

• 21: Amount past due on accounts
• 22: Serious delinquency, derogatory public record or collection filed

Maintaining Good Credit History

To avoid credit history problems, the biggest item by far is avoiding late payments. Even one late payment stays on your credit history for seven years and does immediate damage to your credit score. If you do discover that you missed paying a bill, pay it immediately. Then, call the creditor, explain the oversight, and request that it direct the CRA to remove the late payment item from your credit report.

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• What is a Credit Utilization Ratio?
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Length of Credit History

When your credit history shows old accounts that are still open, it indicates that you have the experience to successfully manage your finances.

Example Reason Codes for Length of Credit History

• 07: Account payment history is too new to rate
• 12: Length of time revolving accounts have been established

Maintaining a Good Length of Credit History
Do not close old credit card accounts. Instead, use old credit cards at least once per year.

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Credit Mix

You benefit from having a variety of debt, including credit cards, personal loans, mortgage, auto loan, student loan, etc.

Example Reason Codes for Credit Mix

• 17: No recent non-mortgage balance information
• 28: Number of established accounts

Maintaining a Good Credit Mix

Don’t open different types of accounts unless you really need them.

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New Credit

New credit is measured by the number of hard inquiries within a set period (usually 45 to 60 days).

Example Reason Codes for New Credit

• 08: Too many inquiries last 12 months
• 09: Too many accounts recently opened

Maintaining Good New Credit

Don’t apply for multiple accounts in the same two-month period.

RELATED: How Do Credit Utilization Ratio and Debt-to-Income Ratio Affect My Credit Score?