Credit Scores Fluctuate—We All Know That. But What Is The Science Behind Credit Karma, And Why Does The Credit Score They Give You Often Differ From The Real Score?
Your credit score is one of the most important figures you will deal with in your life. This number defines your ability to obtain loans, receive financing for large ticket purchases and move forward in life—by building your creditworthiness. Doing this will make things like getting a mortgage for a new house or low interest rates for a new car possible. This can save you huge amounts of money in the long-term and forge a foundation for your future. Having a poor credit score, however, can limit your ability to receive larger loans, credit cards and qualify for better terms. Plus, even if you are able to secure a loan with bad credit, you will be shelling out more money for higher rates. This can inhibit your ability to reach other financial goals.
With all this being said, it’s crucial to keep a watchful eye over your credit score and credit reports. While your financial and spending habits can greatly impact your score, mistakes on your report can also do years of damage which can be easily avoided.
Monitoring your credit today is quite easy, through the number one resource for free credit reporting that is Credit Karma. However, many have begun to wonder about the accuracy of this service and the legitimacy of the company. Some consumers have tried applying for credit cards or loans thinking their credit score was great, but found out after a hard credit pull and subsequent denial that their actual score was lower than what was showing on Credit Karma. Below, we delve into the specifics of why Credit Karma scores aren’t perfectly accurate, but also why this service can still be a useful tool in your financial arsenal.
The Basics of Credit Scoring
Your credit score (or rather, each of them) are three digit numbers which dictate your creditworthiness, or ability to repay debt and loans. These numbers can greatly impact your ability to progress in life. We say “each”, because there are multiple credit scores one person has. Typically, the three main consumer credit bureaus—Equifax, Experian, and Transunion—are the main scorers considered within your credit reports and profile. These reports are filled with important data regarding your open accounts, repayments and financial progress.
Looking deeper, credit scoring models created by companies such as VantageScore Solutions or FICO (Fair, Isaac and Company) intake the information within your credit reports to calculate your actual credit score(s). Various scoring models weight and consider the data in your reports differently—however, high-impact factors such as credit utilization, payment history and derogatory marks usually always affect your score more severely. If you plan on applying for credit, however, make sure to keep a closer eye on your FICO Score as this is almost always the scoring model used by lenders and credit card companies to determine your creditworthiness. So, what is the deal with VantageScore? As it turns out, this is the scoring model that Credit Karma uses—and a major reason for having a different score on this site versus your actual score. Well, what is Credit Karma, anyway?
What Is Credit Karma?
Credit Karma is a personal finance website/company—not a credit card company or credit bureau. The main service which Credit Karma offers is free credit score monitoring. This means you can access your score for free, and over time, check your growth and trends in your score. Credit Karma also offers a free savings account with a highly competitive APY of 1.8%.
When you sign up for Credit Karma, you are required to provide a variety of personal information. This only takes a few minutes, but data such as your Social Security Number will be crucial in order for the company to cross reference you with the credit profiles on TransUnion and Equifax. Credit Karma is indeed a free service, and while that may raise eyebrows, they are a legitimate service which operates based on a unique revenue generation model. Based on your credit history, score and interests, they make credit product recommendations. This can include credit cards, personal loans, mortgage lenders, and more. They receive a small commission when you opt into one of their offers. This enables them to continue to offer credit monitoring services for free.
The Reasons Why Credit Karma Isn’t Totally Accurate
While many people think that their official, most accurate representation of their score is on Credit Karma, this isn’t exactly the case.
The first major reason is due to what was mentioned earlier, regarding the VantageScore 3.0 model which the site uses. This system incorporates many of the same factors as other popular FICO scoring models, such as payment history, amounts owed, length of credit history and credit mix, but weights each factor differently. This is one core reason why your scores may vary, and segues into the next.
Credit Karma only pulls data from two out of the three major bureaus—TransUnion and Equifax. Other lenders may pull your credit from any of the three bureaus, unlike Credit Karma’s calculation. This immediately leads to discrepancies within the calculation process.
Generally, if you have a high score, your score will probably be good across the board. However if you are on the border of, say, 700, this could make determining whether lenders will approve you difficult. This can often make or break loan applications, making relying on Credit Karma a difficult science.
Another major cause for slightly inaccurate scores could be due to the fact that the entire system is not immediate. Credit Karma doesn’t update your score instantly. Your actions need to be initially reported to bureaus. After several days, Credit Karma will use your updated report to adjust your score. Don’t expect your financial actions to reflect on your score overnight!
One factor to consider is that some lenders may not report to all three bureaus. Some may only deal with one or two, and these bureaus may also not update all your reports at the same time.
It’s also important to remember that mistakes happen. Errors on credit reports and quite common, and if even one bureau has your information incorrect, there could be a chance the others do too. Credit Karma also offers a Direct Dispute tool, which has been used to erase over $10.2 billion in erroneous debt from TransUnion credit reports since 2015. That’s just from one bureau! If you find errors within details on your credit report, it’s critical to scrutinize their accuracy and dispute it directly with the bureau.
Make sure to refer back to Credit Karma often to review and track changes frequently to see how your VantageScore 3.0 credit scores from TransUnion and Equifax will fluctuate over time.