Credit Karma: How Reliable Is It?

Credit Scores: What Are They and How Do They Work?

There are various different credit scores that creditors may use to assess the risk of a new borrower in the realm of consumer credit.

Information such as an individual’s account payment history, number of open and utilized accounts, credit usage percentage, and any negative credit concerns are all used to compute one’s credit score, regardless of the kind used.

In most situations, a complex algorithm is used to these facts to generate a three-digit number ranging from 300 to 850. When a fresh credit application is made, the better the credit score, the more sound a borrower the individual is thought to be.

While Credit Karma advertises its free credit score to anybody who wants it, the firm only gives out an individual’s VantageScore 3.0, not the FICO Score, which most lenders use. The VantageScore 3.0 includes some of the same information as the FICO Score and has the same credit score range, but how the information is processed to produce one’s credit score is different.

Users of Credit Karma’s website or mobile app see their VantageScore 3.0 while checking their credit score information.

Credit Karma not only uses a different form of credit score than most lenders and financial institutions, but it also only provides access to two credit scores from two distinct credit reporting bureaus.

Credit Karma now only shows customers their Equifax VantageScore 3.0 and TransUnion VantageScore 3.0 — not an Experian credit score of any type. Given that all three credit reporting agencies provide individual customers with credit scores, leaving out the third may result in Credit Karma users receiving an erroneous picture of their credit profile.

FICO and VantageScore are two different types of credit scores.

FICO is what most people think of when they think about their credit score, whether they realize it or not. Since 1989, when the Fair Isaac Corporation first provided FICO credit scores to customers, the firm has worked hard to stay up with changing consumer habits and how they affect FICO scoring algorithms. FICO was the sole consumer credit score utilized by the three main credit reporting agencies, as well as lenders and financial institutions, until about a decade ago.

VantageScore has taken up the challenge of competing with FICO for the top spot in the consumer credit scoring chain in recent years. VantageScore is able to calculate individual credit scores using identical information and scoring methods as FICO thanks to its partnerships with the three credit bureaus. However, customers should be aware of the distinctions between FICO and VantageScore.

To begin, it’s vital to note that both the FICO and VantageScore methodologies use the same set of customer data: payment history, credit utilization, recent inquiries, credit duration, and credit type. These details, on the other hand, are obtained in a variety of methods.

To provide the most accurate rating, FICO uses credit reports from millions of people at a time, which are obtained directly from the three credit agencies. VantageScore, on the other hand, creates its rating methodology from smaller groups of consumer credit information. Both have a range of scores from 300 to 850, but that’s about where the similarities end.

VantageScore is better for people with a limited credit history since its scoring mechanism just requires one month of activity and one credit bureau account to get a score. In contrast, FICO needs at least six months of credit history and one reported account. This implies that a VantageScore for the same person may be significantly higher than a FICO score, at least at first.

Similarly, when it comes to late payments, VantageScore and FICO have opposing viewpoints. Payment history accounts for 35% of FICO score computations, yet all late payments are treated the same. Late mortgage payments are penalized more harshly in VantageScore computations than other credit accounts, lowering an individual’s VantageScore more than their FICO score.

Overall, examining one’s credit score via Credit Karma may yield different results than viewing one’s credit score directly through one or more credit bureaus. Because of the tiny variances in calculation between VantageScore and FICO credit scores, large discrepancies in scores can occur, making Credit Karma less reliable than most people think.

Other Distinctions to Be Aware Of

Aside from the variations in credit score algorithms between VantageScore and FICO, each major competitor in the consumer credit scoring business has had multiple versions devised and implemented throughout the years. FICO has created 56 different versions of its credit score, one for each of the three major credit agencies, as well as one for each industry that may utilize it.

For example, auto loan lenders may get a FICO Auto Score, which analyzes the same credit data to assess particular risk indicators a borrower could have when it comes to defaulting on a new car loan. Credit card issuers (FICO Bankcard Score), mortgage lenders, and general credit inquiries are all in the same boat.

While VantageScore’s credit scoring algorithm has fewer revisions, at least two versions are still in use by consumers and certain lenders today. Although the variations between these credit scoring systems are minor, the details utilized to generate an individual’s credit score are diverse enough to result in numerous scores for the same person at any one moment.

It’s a little intimidating to think about having many distinct credit ratings floating around out there. Fortunately, using a program like Credit Karma makes tracking VantageScore credit ratings from Equifax and TransUnion rather simple. Consumers should, however, take the time (and pay the small fee) to verify their FICO credit scores from each of the three main credit agencies on a regular basis. This guarantees that there are no significant differences and that the scores are in the best possible range.

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