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Understanding Credit Score Risk Factors

Anytime you receive a credit score, whether you check it yourself or receive it from a lender by way of explaining a lending decision, you also might receive a list of factors affecting your credit score. These are sometimes known as risk factors, or reason codes.

Here's an overview of what those factors mean, why they are important (and sometimes not so important) and how you can use them to work toward better credit scores.

What Are Credit Score Risk Factors?

Risk factors accompany your credit score and tell you why you may have been rejected for a loan or credit card or received a higher interest rate than you'd like. These factors vary depending on the model used to calculate your credit score. Scoring models analyze the data in your credit report using complex math to produce a numerical score, and may weigh some factors differently or not at all.

Lenders use many scoring models, but the most popular are the FICO® and VantageScore® models. Each model produces a three-digit score, with higher scores indicating lower statistical likelihood of defaulting on debts. When these models determine your score, they also identify the information in your credit report that had the biggest negative influence on your credit score—and present that information as risk factors.

Recent versions of both models also generate positive reason codes, indicating the factors having the most favorable influence on your credit scores.

Why Does My Credit Score Show Risk Factors?

Whenever your credit score affects a lender's decision to deny your credit application, or causes you to receive a credit offer or a loan at an interest rate higher than the best one available, the lender must provide an explanation in writing that includes the following:

  • The credit score the lender used to make its decision
  • An explanation of the credit scoring model used to calculate that score
  • A list of at least the top three factors that kept you from getting a higher credit score, ranked from most to least influential

Most outlets that let you check your own credit score also provide a list of risk factors, and many also list one or more positive factors. If you check your free FICO® Score at Experian.com, you'll find risk factors and positive factors listed right below your numerical score.

Facts About Risk Factors

All credit scoring models you're likely to encounter are broadly sensitive to many of the same basic credit management behaviors: Late and missed payments, high credit card balances and excessive debt tend to lower scores on all models, while timely payments, low credit balances and a wide variety of credit accounts tend to promote higher scores.

Risk factors show you which specific influences are lowering your scores and can help you focus your efforts on improving them.

When going over your risk factors, it's helpful to understand their context and how they're generated. That knowledge can give you some perspective on how to prioritize your actions. Understanding your risk factors will also help you figure out which ones you can do something about now and which ones will require patience and persistence to address.

Here's some context and background on credit score risk factors:

The Importance of Risk Factors Is Relative

Unless your FICO® Score or VantageScore credit score is a "perfect" 850, there must be some combination of factors holding it back. Each credit scoring model can list your risk factors, but the closer your score is to 850, the less important they are.

For instance, if you have a FICO® Score in the exceptional range (between 800 and 849), you're essentially doing everything right in terms of credit management. Your score all but guarantees you'll qualify for the best loan offers available from any given lender. So the factors preventing your score from reaching 850 aren't holding it down very much, and their practical impact is negligible.

If your FICO® Score is in the very good range (740-799), your risk factors still aren't doing a lot to hinder your creditworthiness, but you can look to them for ideas on how to fine-tune your credit behaviors and graduate to an exceptional score.

If your FICO® Score is in the good, fair or poor ranges, your risk factors have a greater influence, and identify issues to work on for improving your score and moving up into the next range.

Risk Factors Are Model-Specific

Each credit scoring model has its own risk factors, reflecting the methods it uses to calculate your credit score. The FICO® Score and VantageScore models, for instance, each have well over 100 reason codes. (You can find a full list of all FICO® Score risk factors here. VantageScore provides a website designed to explain its reason codes more fully here.)

Risk Factors Can Be Timing-Specific

Your credit score, and the risk factors associated with it, are a reflection of information stored in your credit report at the moment the score is calculated. Because credit payment and usage data in your credit reports is continually updated, your credit score typically changes frequently, and the factors that influence your score may change too.

Risk Factors Can Be Confusing

For technical reasons, reason codes must be brief. That's why their phrasing isn't always crystal-clear and may not seem logical at first glance.

For instance, "No recent revolving balances"—another way to say your credit cards are all paid off—sometimes appears as a FICO® Score risk factor. To be included in a credit score calculation, accounts need to show activity over time. By making a small purchase each month and then paying the balance in full, you will demonstrate that you are a good credit risk. The balance on your billing statement is what is usually shown in your credit report. Even though you've paid the balance in full, your credit report would show the balance, indicating activity in your account and helping your score.

Taking Action in Response to Risk Factors

To prioritize your response to risk factors, look for words that indicate steps you can take immediately.

  • "Too high": These words appearing in your risk factors may indicate that your outstanding card balances are pushing your scores downward or your overall debt level is considered excessive, and your score would benefit by reducing it.
    There is, of course, some debt you may not be able to address right away, such as the balance on a mortgage or car loan. But if you have outstanding credit card balances, identifying the accounts that are hurting your score the most and devising a strategy to pay them down as soon as possible would likely benefit your credit score relatively quickly.
  • "Delinquency" or "Delinquencies": If these words appear in a risk factor, damage has already been done to your credit score, unfortunately—but you can take steps to prevent that harm from recurring and clear the way for future score improvements.
    Delinquencies are missed payments, the single events that do more harm to credit scores than any other. Credit scores can rebound after delinquencies. The amount of time it takes to do so varies depending on the length of your credit history and many other factors. But while these risk factors call for patience, they also suggest getting proactive about making sure you never miss another payment again.
  • "Collection" or "Accounts in collection": If you see "collection" in a risk factor, it means you've allowed a bill to go unpaid so long that a creditor has turned it over to their collections department or a third-party collection agency. That's not good for your credit score, and it's not good for your peace of mind, since collection agents can be relentless in pursuit of payment and will likely bombard you with mail, voicemail and electronic communications in hopes you'll pay what you owe.
    A collections entry remains on your credit report for seven years from the date of the first missed payment that led to the collections action. These entries hurt your credit score most when they're new, and their impact on your score diminishes over time. There's nothing you can do to get a legitimate collections entry removed from your credit report, and debt collectors are not obligated to remove a collection that's been paid. Paying the debt will get the collection entry updated to reflect that, and a paid collection may do less damage than an unpaid one. In fact, some scores exclude paid collections from the calculation, so paying it off could help your scores almost immediately.
  • "Too few": This phrase in a risk factor, when made in reference to different types of credit accounts (revolving accounts or installment accounts, for instance) can be an indication that your credit score would benefit from an improved credit mix—a greater number and variety of loan and credit types.
    It's never a good idea to take on extra debt you can't handle, but if and when it makes sense for you to do so, taking out a car loan or opening an additional credit card account might improve your score depending on how you manage it.

Accept the Risk Factors You Cannot Change

Certain risk factors, such as "short account history" and "length of time accounts have been established" reflect the fact that longer positive credit histories represent less risk. The longer your positive payment history, the better your scores will become.

Similarly, a factor such as "amount owed on mortgage loans is too high" simply means you've got to keep making mortgage payments on time (and you already know that). If you persevere and avoid missed payments and other missteps, your score will tend to improve over time.

By calling out the influences that have the greatest negative impact on your credit score, risk factors can help you decide where to focus your efforts at improving your scores. When you understand how to apply them, they can be effective tools for building credit over time.

How Good Is Your Credit Score?

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