Whenever you are looking to buy a home, car, or take out an installment loan of any kind; the chances are very likely you will need to know what your credit score is in order to know if you are receiving the best deal with regards to special finance offers and interest rates. I have heard it all my life that you should closely monitor your credit score and your credit report for any mistakes or to see if any fraudulent activity has been initiated with your identity without your knowledge. (AKA Identity Theft)
I wholeheartedly agree with this advice and we used credit karma to help with monitoring our credit. However, we soon realized that there is an issue with the accuracy of the scores on credit karma. This was blatantly evident when we went to buy a new car this past week. My sales associate asked me if I knew what credit karma has my score at and I said, Yes, I do but it is wrong. He didn't believe me until I showed him my credit karma score and gave him my information and said, "Now, go ahead and run it." He was trying to figure out how in the world I got top tier financing with the credit score I showed him on credit karma. Once he ran my credit he stood there mouth wide open with his jaw dropped and said, "I never would have believed you until I just saw it myself; that's a 100 point difference!"
I said, "yeah, I know!" Needless to say I got my top tier financing because I did monitor my credit scores on all 3 credit bureaus so I knew ahead of time what my buying power was. I had already learned not to go by credit karma. Now, the reason these scores are so different is because they use a VantageScore Model where other industries use a FICO score. These utilize the same credit profile information but they utilize the same information in different ways and scoring models.
Let's take a brief look at how these differences occur and what those differences are between VantageScore and FICO scoring models.
FICO (Fair Isaac Corporation) Scoring Model
When most people think of their credit score, they are most likely thinking about FICO. The Fair Isaac Corporation introduced FICO credit scores for consumers in 1989. Since then, they have worked diligently to keep up with consumer behaviors, and how those behaviors impact the FICO scoring calculations. Up until about a decade ago, FICO was the only consumer credit score used by the three major credit reporting bureaus (Equifax, Experian, TransUnion), and the only score used by lenders and financial institutions. (Emerald Credit Union)
FICO requires 6 months of credit before issuing a credit score where VantageScore only requires 1 trade line and 1 month to establish a credit account.
VantageScore created a single model used by all three credit reporting agencies (CRAs): Experian, Equifax and TransUnion.
FICO uses individual scoring for each Credit Reporting Agency. These scores can also be further broken down by Industry by trades like Automotive, Insurance, and Mortgages. "Depending on their needs, a lender may use a score produced from one agency or combine two or more. For mortgages, the most common combination has always been the "tri-merge", where all three credit reports are used in making the decision to grant credit." according to HSH Gina Pogol.
She goes on to explain that this too will be changing. "since FHFA will allow Fannie Mae and Freddie Mac to start to accept a "bi-merged" report from two CRAs, although the October 2022 announcement noted that Fannie and Freddie "will work with stakeholders on a plan for implementing the change from a tri-merge credit report requirement to a bi-merge credit report requirement," without providing any sense of when this will actually occur."
Individual creditors set their minimum scores and score-related rates and terms. But FICO and VantageScore use two different score ranges:
FICO scores:
- Exceptional: 800 and up
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 500 to 579
VantageScores:
- Excellent: 750 and higher
- Good: 700 to 749
- Fair: 650 to 699
- Poor: 550 to 649
- Very poor: 500 to 549
While VantageScore and FICO now use the same 300-850 range, VantageScore tiers run about 50 points lower than FICO tiers. (HSH)
This is why we started monitoring our score using the 3 free annual reports available by the 3 main credit reporting agencies. This can easily be accomplished by utilizing the free reports available online on an annual basis. We use credit karma to monitor any new activity reported on our accounts and to see what changes have been made to our credit reports based on their scoring models. It is important to understand that FICO and VantageScore weight (prioritize) their results differently which also leads to different credit scores.
AnnualCreditReport.com offers a free copy of your credit report every 12 months, from each of the credit reporting bureaus. Reports that include a FICO score can be acquired from Equifax, Experian, and TransUnion directly, for a nominal fee.
Here is how each model scores your credit based on their criteria. So, it is not only important to note that there is a difference it is also important to know what those differences are and how they affect your scores.
Here is how FICO weighs the factors that comprise its score:
- Payment history: 35%
- Credit utilization: 30%
- Length of credit history: 15%
- Mix of credit: 10%
- New accounts opened: 10%
And here is the VantageScore 4.0 calculation:
- Payment history: 40%
- Age and type of credit: 20%
- Credit utilization: 20%
- Balances: 11%
- Recent credit: 5%
- Available credit: 2%
You can easily see where the FICO scoring model is heavily weighted on payment history and credit utilization where VantageScore doesn't put near as much weight on credit utilization or available credit. Notice that the length of credit history is no where on the VantageScore method.
There is a main benefit of the VantageScore model. VantageScore ignores extra pulls that occur within a 14-day window. If you apply for several different loans, even different kinds of loans, within that period, only one pull counts against you.
Recent FICO models have a 45-day shopping window, while older models (including those that are still used for mortgage lending) give you just 14 days to shop for your mortgage. And FICO scores count multiple inquiries against you unless they are for student loan, auto loan or mortgage applications. So, remember that the next time a retail clerk offers you 20% off your purchase for applying for their department store credit card.
FICO also creates industry-specific auto and bankcard scores, which have slightly different formulas designed to better serve those creditors.
According to FICO, there are six base generations of their scoring models in active use, including FICO 2, 4, 5, 8, 9, 10. Each one of those also have a number of industry-specific variants of each. VantageScore is only up to it's fourth generation of its model, and while most lenders are likely to use the newest versions, any of those four might be in use so keep that in mind as well.
If you want a quick boost to your credit score try Experian Boost which utilizes your utility bill payments and mobile/cellular payments and adds them into your Experian Credit Report. You can also devise a payment plan to pay off the smaller debts first and focus your attention on some quick wins and you will always want to pay a little more than the minimum due if you can afford to do so.
Remember, your mortgage lender can help you to establish some quick wins with regards to your credit score. Mortgage lenders have access to a service called "rapid rescoring" that may help increase your score in one to two days when you apply for a mortgage. It's not that Credit Karma is inaccurate as much as the types of loans you are applying for may not use that scoring model and you may be in better shape than you think! Please see the associated links for more detailed information and for the annual credit report that is available to each and every consumer.
JL Owens
Posted by Adkins & Associates Real Estate on
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