You pull up your Credit Score on Credit Karma and it says you have a 750 Score, but the lender pulls your credit report and they say you have a 683. You are frustrated because you assumed that Credit Karma was accurate. So what is the difference, and how can this affect you getting a home loan, or a car loan. Let's try to clear this up by going over Credit Scores, who produces them and the difference.
First of all, the words “Credit Score” is a general term, like Pickup, or Truck, and does not represent a specific score or item, like Ford F150 or Dodge Ram 1500.
History
FICO
FICO stands for Fair Isaac Company, and was created by 2 dudes in 1956. Bill Fair, an engineer and Earl Isaac, a mathematician, thus creating the FICO or Fair Isaac Company, and their algorithm . Skip forward to 1991, when FICO scores were released by EquiFax (FICO 5), Experian (FICO 2) and Transunion (FICO 4), each tweaking the score just ever so slightly to distinguish themselves from each other. In 1995, Fannie Mae & Freddie Mac, the overseers of home loans started utilizing the FICO scores for mortgages. Then in 2009 FICO became a publicly traded company.
Credit Karma
Credit Karma utilizes the VantageScore, which is a TOTALLY different mathematical calculation than FICO. Credit Karma was created by Kenneth Lin, Ryan Marciango and Nichole Mustard in 2007. Their work was then sold to Intuit (think TurboTax) in 2020 for $8.1 Billion, not too shabby of a profit!
Credit Scoring
Both companies score a person based on certain factors, like:
- Payment History: Do you pay on time (Hint: Always pay on time and always pay more than the minimum payment)
- Amounts owed: How much of a balance to you carry vs credit limit (Hint: Always keep you balance <30% of your limit)
- Length of time: How long have you had the credit line open (Hint: Never purposely shut down credit keep it open, and use the credit atleast 1 time per year)
- Collections, judgement, liens (Obvious: Always pay your debts)
From there, adding new credit can affect your scores and having a mix of credit can also affect your scores.
FICO scoring is from 300 to 850
- 300 to 579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very Good
- 800-850: Exceptional
VantageScore is from 300 to 850
- 300-600: Poor
- 601-660: Fair
- 661-780: Good
- 781-850: Excellent
And that is pretty much where it ends of their similarities. From here the scores differ quite dramatically.
The algorithm or mathematical calculation which each of the two use is quite different, as they look at each factor differently and weigh them differently, some examples:
- Length of History: FICO needs a creditor to provide data to them for at least 6 months, which Credit Karma uses data from minimum 1 month history.
- Liens & Judgements: FICO scores are significantly impacted by liens and judgements, whereas VantageScore are weighed less, but still have a little effect.
- Credit history: FICO uses trending data, which looks at the 24 month history, payments, lates, balances and pulls that into the score at the time the scores are generated. VantageScore is reflective of behavior of time, to include up to 2 years worth of data in the calculator.
What does this mean to me?
The VantageScore should be used as a guidance, but definitely not gospel. We have seen these scores be anywhere from 50 to 100 points off a FICO score. But, every once in a while we do see the scores within 10 points of each other.
The VantageScore is basically a marketing model that is used to mine your data, and sell it to advertisers to sell you something, typically credit, or maybe a new car.
The FICO score has been the standard in lending since 1995, and all lending institutions (banks, credit unions, mortgage brokers) are required to use FICO. Will this ever change, well that will depend on who has the better lobbying company and spends the most money. Now don’t get us wrong FICO also is a marketing model as well, selling your data.
Note: If you DO NOT want these people selling your data, log onto: www.optoutprescreen.com We HIGHLY Recommend everyone do this.
This Federally mandated web site will prevent you data from being sold.
Another note about FICO. They also have different calculations which are used in different lending industries. Currently there is:
FICO 2: Used by lenders when pulling Experian Score
FICO 3: Not being used.
FICO 4: Used by lenders when pulling TransUnion Score
FICO 5: Used by lenders when pulling Equifax Score
FICO 8: Used by Auto Dealers & Credit Cards
FICO 9: Being used for advertising and offers & “Free” credit score.
So how do I check my accurate credit score?
Well they do not make it easy, even though they say they do. You can go to www.annualcreditreport.com and there you can pull all 3 of your credit reports, but they will not give your FICO scores, unless you pay for them. And they typically are FICO 9 scores.
You can view your Credit Karma score on their website, but keep in mind these scores are NOT true scores which the lending world recognizes, use them as a guidance,
So moral of that story, you can’t get an accurate lending FICO score, unless you apply for some type of credit. Then the lender is required to provide you your FICO scores. They are not, however, allowed to release your credit report to you.