The Reasons You're Not Getting Credit
When you're trying to get a credit card or other types of loans, like mortgages and auto loans, banks have to decide not just if they're going to lend to you, they also have to decide how much interest to charge you. One of the tools they use to help make that decision is your credit score.
Your credit score is a three-digit number that's a numerical representation of your credit risk. It's based on a snapshot of your credit report at one point in time, so it can fluctuate depending on things like how much outstanding debt you have and whether you've recently opened a credit card. Along with your credit history, banks use your credit score to determine if you're likely to default on a loan in the next couple of years. If they think you're worth the risk, they'll give you a loan. If they think you've got great credit, they'll even give you a deal on the interest rate you'll pay.
Credit scores come from two major companies: Fair, Isaac Corporation--or FICO--and VantageScore, which was developed by Experian, Equifax and Trans Union, the three credit reporting companies. Both scores range from 300-850, and FICO has a newer product that goes up to 950. The higher the number, the better your credit is.
It's pretty easy nowadays to find out your credit score. Some credit card issuers like Discover and Citi give them free to their card members. Other websites like Credit Karma also give free credit scores. Credit bureaus sell them too, and it's also possible to get them after you've applied for credit or a loan.
When you get your credit score, there will also be a list of codes and statements that explain why your credit score is the number that it is. In the financial industry, these are known as reason codes, and there a lot of reasons why your score isn't higher--unless it's at the best score possible, at which point you can't improve it any.
Reason codes can give you the clues as to why your score isn't higher--even if it's already in the highest bracket. This is because federal law requires lenders to let people know when they've used a credit report in conjunction with a loan application, and if they haven't given the applicant their best rates, they have to say why that is. That's designed to help you up your credit score and get that loan or a better rate next time.
Typically, you'll get four reasons as to why your credit score is what it is, and they're ranked in order of most to least important. It's important to remember that if you were denied credit or got a lousy interest rate, these reasons aren't the sole reasons for that. Lenders use credit scores as one tool to determine your creditworthiness; they aren't the end all, be all for credit application approvals.
Reason codes cover the gamut of possibilities. Some of these include your total balances on all your open accounts being too high; the amount paid down is too low; the length of time you've had accounts open; and having accounts in delinquency can all affect your total score. You may also have a lower score if you don't have much of a credit history, or if you have available credit on a credit card account but haven't used the card in a while.
If your credit score is already high, even with reason codes, there may not be a whole lot you can do about it. However, if your score is low, look at those reason codes to help you understand what you need to do to improve your overall credit. Taking those steps could pay off in more favorable terms on your credit card interest.