What is a Credit Score, and is Credit Karma Accurate?

Credit score app and a coffee

A credit score is a number that represents your creditworthiness. this number is generated from the information in your credit report. the higher your score, the less likely you are to miss payments or default on your loans and obligations.

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The five main factors that make up most credit scores are:

  • Payment history
  • Credit utilization
  • Length of credit history
  • Credit mix
  • New credit accounts
  1. Payment history: A good payment history is one of the most important factors in a credit score. Lenders want to know that you’re reliable and will likely repay your debt on time. The more often you make payments on time, the higher your credit score will be.
  2. Credit utilization: Another important factor is how much of your available credit you’re using. If you have a high credit utilization ratio, it may indicate that you’re overextended financially and are at risk of defaulting on your loans.
  3. Length of credit history: The longer your credit history, the better. This shows that you’ve been able to handle debt responsibly over time.
  4. Credit mix: A diverse credit mix is considered positive by lenders. This means that you have experience with different types of loans, such as mortgages, car loans, and credit cards.
  5. New credit accounts: Opening new credit accounts can hurt your credit score if you’re not careful. It can make you look like a riskier borrower and raise your credit utilization ratio.

How can I check my credit score?

There are a few ways to check your credit score. You can get a free credit report from AnnualCreditReport.com, which will list all of your active credit accounts and the associated credit scores. You can also use a service like Credit Karma to check your score for free. Another option is to purchase a credit score from one of the three major credit bureaus (Equifax, Experian, and TransUnion). The three bureaus together formed a company called VantageScore Solutions, which is the credit scoring model used by and increasing number of lenders, however, mortgage lenders do not usually use this model. myFICO.com is another site that will give you several versions of your FICO score to monitor and is usually the closest scoring model you’ll find to what the mortgage lenders are using.

How accurate is Credit Karma?

Credit Karma uses the VantageScore 3.0 model to generate its scores, which is a widely used scoring model for credit monitoring. Because each lender has its own criteria for approving loans, your score on Credit Karma may not perfectly align with the score a lender would use to evaluate your loan application. It’s accuracy varies heavily on the type of tradelines on your report, and how long ago they were reported as well as the type of loan you are looking for.

For example, if you have a long history of timely payments on loans and credit cards, your Credit Karma score is likely to be very accurate. However, if you have a shorter credit history or you’ve had some recent late payments, your score may be less accurate. If you are applying for a home loan, Credit Karma uses a completely different weighting and criteria system, so the score can vary.

In general, Credit Karma is a good way to get an idea of where you stand in terms of your credit score. However, it’s not perfect, and you shouldn’t rely on it as the only factor in deciding whether or not to apply for a loan. When it comes to mortgages, Credit Karma may not be the best option. This is because mortgage lenders use a different scoring model than the one used by Credit Karma, so your scores may not match up exactly. In the U.S., mortgage lenders use FICO Scores in 90% of lending decisions. 

How does FICO compare to VantageScore?

There are a few key differences between FICO scores and VantageScores. One is that FICO scores consider tax liens and public records, while VantageScores do not. Additionally, the scoring models use different weighting systems for the various credit factors. For example, payment history is worth 41% at VantageScore 3.0, while FICO is 35%. The age of your credit profile is 21% with VantageScore 3.0, while FICO is 15%. So you can see how some factors can affect your score much more in one model compared to another. This is why it’s best to get the scoring system that your lender would be using to better understand your score.

Another difference is that there are multiple versions of each scoring model. FICO® reports that they have 16 distinct versions of the FICO® Score in use, while VantageScore has four (1.0, 2.0, 3.0, and 4.0). The version that’s used by a lender will depend on which model they’re using and what type of loan you’re applying for. There are also industry specific scoring models that tailor the score to emphasize those purchases.  For example, there’s a FICO® Auto Score version that’s used by auto lenders to help them make decisions about car loans, those wouldn’t be used on credit cards or homes.

The bottom line is that your credit score may be different depending on the model used. If you’re concerned about your mortgage credit score, it’s best to check with your lender to see which model they use and what specific factors they consider when making their decision. They can also run your credit and let you know what each credit bureau is reporting. However, if you just want a general idea of where you stand, Credit Karma is a good place to start.

Do I need a good credit score to get a mortgage?

A good credit score is not required to get a mortgage, but it will affect your interest rate and loan terms. Mortgage lenders use credit scores as one factor in their decision-making process. The higher your score, the lower your interest rate and the better your loan terms. Some example minimum scores by loan type are:  

  • Conventional Loan: 620
  • FHA Loan: 580 
  • VA Loan: No minimum score, but most lenders prefer a 580+

For all loans, the higher your credit score, the better. A higher credit score means you’re seen as a lower-risk borrower, which will lead to more favorable loan terms.

A higher credit score also affects your minimum down payment. For FHA loans, the minimum down payment is 3.5%, but you’ll need at least a 580 credit score to qualify for that. If you are between 500 and 579, you may still qualify, but you will have to put 10% down. 

A higher credit score may also allow you to have a higher DTI (debt-to-income) ratio and still qualify for a loan. The DTI for FHA  loans is 43%, but if you have a high credit score, you may be able to get approved with a DTI ratio of up to 50% and in some cases as high as 55%.  This gives you more buying power for the same income and down payment as someone with a lower credit score.

The bottom line is that having a higher credit score will give you more options and better terms when you’re looking for a mortgage. 

In summary, Credit Karma is a good way to check your credit score and get an idea of where you stand. However, it’s not perfect, and your score will be different than what a lender sees. Mortgage lenders usually use FICO Scores, so it’s always best to check with them directly to see what they’re looking for. You’ll need a good credit score to get a favorable interest rate and loan terms on a mortgage, and better credit scores can not only give you better interest rates, but more buying power.