Understanding Your Credit Score And What That Means For FDR Clients

Understanding Your Credit Score And What That Means For FDR Clients

Freddie Huynh / VP, FDR Data Optimization

December 3, 2020

Understanding Your Credit Score And What That Means For FDR Clients

I’ve spent most of my professional life building credit scores. Whenever I used to deliver one of my Credit Scoring 101 seminars, one of the most important things that I wanted the audience to take with them is understanding why they receive the score they do. Everyone is hyper-focused on the actual score, but what is just as important is understanding how they got there? If I failed a driving test, is it because I had a lead foot? Or is it because I didn’t know how to parallel park? Once I know why I failed, I can focus on addressing my weak spot. The same goes with credit scores.

How ECOA Can Help You Understand Your Credit Score

The Equal Credit Opportunity Act (ECOA) is a landmark law introduced in the mid 1970’s that made it illegal for lenders to discriminate on the basis of race, sex, marital status, and other protected classes. There are other important components of ECOA, but one aspect that I want to bring to your attention for this conversation is the fact that ECOA requires lenders to inform consumers why they were denied for credit.

If a consumer applied for credit and was denied, the lender would be required to disclose the primary reasons why the consumer was declined. If a lender used a credit score to drive the credit decision, the principal reasons for decline must be disclosed to the consumer. These principal reasons must be derived from the score. To me this is critical, because knowing your score is one thing, understanding why you are scoring the way you are is just as important because it allows you to identify the root cause.

As an example, let’s look at the FICO® Score. With every FICO® Score, up to five reason codes are returned.1 The codes are provided to lenders to assist them with adverse action notification – disclosing to declined consumers why they were denied for credit. These reason codes are returned in order of their importance or impact to the score. For example, the first reason is the most influential, and explains why the consumer is not scoring higher. This is critical information that can help consumers understand their score and thus, manage their financial situation.

Understanding FDR Clients From Their FICO®Scores

Through this lens, we can take a closer look at our 2020 FDR Clients and see that FDR Clients are undeniably stressed. The biggest reason why FDR clients do not score higher on their FICO® Score is because their credit card utilization is too high. In fact, over 98% of the time, the primary reasons why FDR clients entering the program do not score higher on their FICO® Score is because their credit card utilization is too high, or because of serious delinquency and/or derogatory public record or collection information. Here is what the distribution of “reason codes” looks like.

The chart above illustrates the distribution of Reason Code 1 for the FICO® Score for 2020 FDR Clients. This represents the most influential factor in the FICO® Score for FDR Clients. For example, 38.8% of the time, high credit card utilization is the greatest reason why FDR Clients do not have higher FICO® Scores.

In fact, if we look at all the reason codes, as opposed to the first reason code only, 96% of the time, high credit card utilization is one of the greatest reasons why our clients do not have higher FICO® Scores. In the rare cases where a high credit card utilization isn’t one of the top factors, these clients have bigger problems such as severe delinquency. The average FICO® Score for these clients is 586, thirteen points lower than the average FICO® Score of our 2020 FDR Clients.

This is why Freedom Debt Relief can be such a good fit for these consumers. The last thing these specific consumers need is more credit, particularly at a high interest rate. Rather than adding to their indebtedness and stress, they can tackle the root cause of the problem and use Freedom Debt Relief to address their cash flow problems. We’ve seen how our successful clients have improved their situation with debt relief.

Really Understand your FICO®Score

So next time you look at your credit score, now you know to look for the reason codes too, and you’ll know they can help explain a little more about how you received your score. In fact, I’ll go a little further and say that if you’re distressed, understanding why and correcting the root cause is going to be more important than the actual score itself.


1. Up to five reason codes are returned by the FICO® Score. The fifth reason code is returned to comply with the FACT Act (FACTA). The fifth reason code can be used to indicate if inquiries influenced the score in any significant magnitude.

Freddie Huynh / VP, FDR Data Optimization

Freddie Huynh is Vice President of Data Optimization for Freedom Debt Relief where he is responsible for identifying new and better ways to use data to enhance their debt relief program. Previously, he spent 3.5 years at Freedom Financial Asset Management re-architecting the credit risk infrastructure to deliver some of the best returns within the marketplace lending industry. Freddie also spent 18+ years at FICO where he oversaw the development, maintenance, and analytic support for FICO® Scores and was the architect of FICO® Score 8 and FICO® Score 9. Also a financial writer and contributor, Freddie holds a B.A. in Mathematics from Claremont McKenna College and an M.S. in Operations Research from Stanford University.