Having a good credit score is something many aspire to, and it can be difficult to achieve. A good score can give you access to bank loans, credit cards with better interest rates or even more housing options.
But what happens when you get two vastly different scores from competing reporting agencies? Which is the one can you trust? Does the one company have more information on you than the others? Tap or click here to get your free annual credit report.
This is what social media users have been wondering lately. Many noticed that their score through Credit Karma seemed to be much higher than what it should be. Let’s go over why this is happening and how credit scores are calculated.
Here’s the backstory on the score
To understand the intricacies of the differing results, you must understand how the scores are calculated. Throughout the U.S, there are several types of credit scores, but most people will be familiar with the FICO Score.
FICO is used by 90% of banking institutions and has been incorporated into the lending business since 1986. While FICO Scores range between 300 to 850, a good score is between 670 and 739. This will get you better mortgage rates and lower interest.
It’s undoubtedly a veteran in the field, but a new system arrived on the market in 2006: VantageScore, created by Equifax, Experian, and TransUnion.
Why does the score matter to you?
The three financial institutions joined to create VantageScore to address changing shopping and investing behavior and disposable income. VantageScore has gone through four different models since 2006, and the latest version (4.0) uses the same 300 to 850 score range as FICO.
But while it can take up to six months to get an accurate FICO Score, it only takes one month of credit history to generate a VantageScore. This is how you could have a big discrepancy between scores.
Another big difference between the two credit scores is the categories that each look at when determining your financial well-being.
VantageScore looks at six categories:
- Payment history
- Age and type of credit
- Percentage of credit limit used
- Total balances and debt
- Recent credit behavior and inquiries
- Available credit
FICO, on the other hand, uses five categories:
- Payment history
- Amounts owed
- Length of credit history
- New credit
- Credit mix
What can you do about it?
In the case of Credit Karma, it makes use of the VantageScore. VantageScore data could be slightly higher than others, as it doesn’t generate industry-specific scores — only base scores. As you might have guessed, FICO generates both kinds: base and industry-specific scores.
As Credit Karma explains, the chances of your credit score being the same on both models are highly unlikely.
“Lenders don’t always report to the three major consumer credit-reporting agencies: Equifax, Experian and TransUnion. And they provide information to different bureaus at different times. So it’s not unusual for your scores to vary slightly between agencies,” Credit Karma explained on its website.
Since your score can change almost daily, most services will tell you not to fixate on the numbers. The better thing to do would be to monitor your spending habits, reduce debt if you can and pay bills on time.
“All the scoring models try to predict the same thing using the same underlying data. As a result, if you focus on building a good credit history, you can improve all your scores. One way to do that is to monitor your credit regularly,” Experian explains.
It is also worth keeping in mind that VantageScore and FICO aren’t the only scores available to lenders. Some have their own in-house algorithms and calculations, so it’s best to ask which scoring system they are using.