5 - What is a Credit Score, and is Credit Karma Accurate

Today I’ll be talking about What is a Credit Score, and is Credit Karma Accurate.

See full show notes @ https://fthbpros.com/what-is-a-credit-score-and-is-credit-karma-accurate/

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.

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.

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.

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Episode Transcript

Philip (00:00):
Welcome to the loan pros podcast, where we help make you

(00:03):
a more informed homebuyer today.
I'll be talking about whatis a credit score and is
credit karma accurate.
A credit score is a numberthat represents your credit.
Worthiness.
This number is generatedfrom the information

(00:23):
in your credit report.
The higher, the score,the less likely you are to
miss payments or default onyour loans and obligations.
The five main factorsthat make up most credit
scores are payment history.
Credit utilization.
Length of credit history.
Uh, credit mix.
And new credit accounts.

(00:45):
That first one payment history,a good payment history is
one of the most importantfactors in a credit score.
Lenders want to know thatyou're reliable and will
likely repay your debt on time.
The more often you makepayments on time, the
higher credit score will be.
The second iscredit utilization.
Another important factor ishow much of your available

(01:07):
credit you're using.
If you have a high creditutilization ratio, it
may indicate that you'reoverextended financially
and are at risk ofdefaulting on your loans.
The third is lengthof credit history.
The longer your credithistory, the better.
This shows that you'vebeen able to handle debt

(01:27):
responsibly over time.
The fourth is credit mix.
A, diverse credit mix isconsidered positive by lenders.
This means that you haveexperienced with different
types of loans, such asmortgages, car loans.
And credit cards.
The last number fiveis new credit accounts.

(01:48):
Opening new credit accountscan hurt your credit score.
If you're not careful, itcan make you look like a
riskier borrower and raiseyour credit utilization ratio.
How can I check my credit score?
There are a few ways tocheck your credit score.
You can get a free credit reportfrom annual credit report.com,
which will list all of youractive credit accounts and

(02:10):
the associated credit scores.
You can also use a servicelike credit karma to
check your score for free.
Uh, another option is topurchase a credit score
from one of the threemajor credit bureaus.
Equifax Experian and TransUnion.
The three bureaus togetherformed a company called
vantage score solutions.
Which is the creditscoring model used by an

(02:32):
increasing number of lenders.
However, mortgage lenders donot usually use this model.
My fico.com is another site thatwill give you several versions
of your FICO score to monitor,and is usually the closest
scoring model you'll find towhat mortgage lenders are using.
So let's say we're going totake a look at credit karma.

(02:55):
How accurate is it?
Credit karma currentlyuses the vantage score.
3.0 model to generate at scores,which is a widely used scoring
model for credit monitoringbecause each lender has its own
criteria for proving grounds.
Your score and creditkarma may not perfectly
align with a score.
A lender would use to evaluateyour loan application.

(03:19):
Its accuracy varies heavilyon the type of trade lines or
what's in your credit report.
and how long ago they werereported, as well as the type
of loan that you're looking for.
For example, if you have along history of timely payments
on loans and credit cards,your credit karma score is
likely to be very accurate.

(03:40):
However, if you haveshorter credit history,
Or you've had somerecent, late payments.
Your score may be less accurate.
If you're applying fora home loan credit karma
uses a completely differentweighing and criteria system.
So the score can vary muchmore in general credit karma
is a good way to get anidea of where you stand in

(04:02):
terms of your credit score.
However, it's not perfect andyou shouldn't rely on it as the
only factor in deciding whetheror not to apply for a home loan.
When it comes to mortgages,credit karma may not
be the best option.
And this is because mortgagelenders use a different
scoring model than theone used by credit karma.

(04:23):
So your scores, aren'tgoing to match up.
Exactly.
In the U S mortgage lendersuse FICO scores in 90%
of lending decisions.
So how does FICO compareto vantage score?
there's a few keydifferences between FICO
scores and vantage scores.
And one is that FICO scores.
Consider tax liens andpublic records while

(04:45):
vantage scores do not.
Additionally, the scoring modelsuse different weighing systems
for the various credit factors.
So for example, your paymenthistories were 41% with vantage
score three while FICO's at 35%.
The age of your creditprofiles, 21% with vantage
score three while FICO is 15%.

(05:06):
So you can see how somefactors can affect your
score much more in onemodel compared to another.
This is why it's best to getthe scoring system that your
lender would be using tobetter understand your score.
Another difference is that thereare multiple versions of each
scoring model, FICO reportsthat they have 16 distinct

(05:27):
versions of the FICO scoreand use while vantage score
has for 1.02, three and four.
The version that's usedby a lender will depend
on which model they'reusing and what type of
loan they're applying for.
There are also industryspecific scoring models that
tailor the score to emphasizethose types of purchases.
For example, there's a FICOauto score version that's used

(05:50):
by auto lenders to help themmake decisions about car loans.
Those wouldn't be used on thingslike credit cards, our homes,
the bottom line is that yourcredit score may be different
depending on the model used.
If you're concerned about yourmortgage credit score, it's best
to check with a lender to seewhich model they use and what
specific factors they considerwhen making their decision.

(06:11):
They can also run your creditand let you know what each
credit bureau is reporting.
However, if you just want ageneral idea of where you stand.
Credit Karma's greatplace to start.
Now that you have an ideaof where your credit's at,
do you need a good creditscore to get a mortgage?
Do you need a perfect creditscore to get a mortgage?
. A good credit score is notrequired to get a mortgage,

(06:35):
but it will affect yourinterest rate and loan terms.
Mortgage lenders usecredit scores as just one
of the factors in theirdecision making process.
the higher your score, thelower your interest rate and
the better your loan terms.
Some examples of minimumcredit scores by loan types
are for conventional loans.
A six 20 score.

(06:57):
For an FHA loan,a five 80 score.
For VA loan for veterans,there's actually no minimum
score, but most lendersare going to prefer at
least a five 80 score.
For all loans, the higheryour credit score, the better.
A higher credit score meansyour seen as a lower risk
borrower, which will lead tomore favorable loan terms.

(07:19):
A higher credit scorealso affects your
minimum down payment.
For example on an FHA loan,the minimum down payment is
typically three and a halfpercent, but you're going to
need at least a five 80 creditscore to qualify for that.
If you're between fivehundred and five seventy
nine, you may still be ableto qualify, but you're going
to have to put 10% down.

(07:40):
A higher credit score.
I may also allow youto have a higher DTI or
debt to income ratio andstill qualify for a loan.
The DTI for FHA loans is 43%.
But if you have a highcredit score, you may be
able to get approved witha DTI ratio of up to 50%.
And in some cases with somelenders, As high as 55%.

(08:05):
This gives you much morebuying power for the same
income and down payment.
As someone with alower credit score.
The bottom line is thathaving a higher credit score
will give you more optionsand better terms when you're
looking for a mortgage.
In summary credit karma is agood way to check your score and
get an idea of where you stand.

(08:26):
However, it's not perfect.
And your score will be differentthan what mortgage lenders use.
Uh, mortgage lendersare using FICO scores.
So it's always best tocheck with them directly.
See what they're looking forand have them run your credit.
You'll need a good creditscore to get favorable interest
rates and loan terms on amortgage and better credit

(08:47):
scores can not only giveyou better interest rates.
But more buying power.
I hope this helps makeyou a more informed buyer.
Thank you.