You need credit for pretty much every major purchase you make. Lenders will pull your credit report whenever you’re trying to buy a house and even when you’re trying to buy a car. A higher credit score increases the likelihood of your application being accepted and can lower the interest rates during repayment.
Since a perfect credit score is nearly impossible to achieve, you probably have room for improvement. The key to improving your score is to monitor your progress closely. One of the easiest and most popular ways to do that is to use Credit Karma.
What Is Credit Karma?
Credit Karma is a San Francisco-based international personal finance company founded on March 8, 2007. Kenneth Lin (executive officer), Ryan Graciano (chief technology officer), and Nichole Mustard (chief revenue officer) created the company with the belief that people have the right to access their financial data and credit information for free.
The launch came at just the right time as the 2007-2008 financial crisis was in full swing. Users quickly flocked to the site, and it became an overnight sensation.
What Does Credit Carma Do?
The primary function of Credit Karma has always been to help users monitor their credit scores by offering free score reports. You’ll receive personalized breakdowns that indicate which issues impact your score the most and how to address them.
Credit monitoring isn’t the only benefit of using Credit Karma. The site also allows you to dispute errors on your credit report, file your taxes for free, check for unclaimed money, and open up a savings account.
How To Use Credit Carma
To use Credit Karma, you’ll first need to give the company some of your personal information. For example, the company will need to know your full name and the last four digits of your Social Security number.
Credit Karma will request your permission to use your personal information so it can compile a VantageScore credit report and make recommendations that can save you money.
You’ll be able to search for personalized offers for credit cards, car loans, and mortgages without the search appearing in your credit report.
How Accurate Is My Credit Karma Score?
Overall, the information that Credit Karma provides will be highly accurate. The problem is that it doesn’t display the entire picture.
The VantageScore model that Credit Karma uses will only show your score according to Equifax and TransUnion. It won’t tell you your current Experian score or FICO (Fair Isaac Corporation) score.
These four scores are not always the same, so you’ll only have access to half of your overall credit report.
What Is Your VantageScore?
The three major credit bureaus (Equifax, TransUnion, and Experian) jointly developed the VantageScore algorithm to predict how likely a borrower is to repay a loan.
VantageScore was created in 2006 and has undergone a few tweaks since. Credit Karma currently uses the VantageScore 3.0 scoring model that has a scale ranging from 300 to 850.
What Does Your Credit Karma Score Tell You?
Experian and FICO scores are roughly in the same range as Equifax and TransUnion. Having a high credit score according to Credit Karma usually means that you also have a high credit with Experian and FICO.
The only problem is that a difference of a few points can be the difference between a loan application being accepted and denied.
Even worse, more than 90 percent of top lenders use FICO Score 8. So if you’re looking to take out a large loan, it might be a good idea to find your FICO score first.
How Are Credit Scores Determined?
VantageScore and FICO are the two main formulas to determine your credit score. While both use similar criteria to calculate your score, some key differences exist in their values.
Here is a breakdown of both formulas and how different their formulas are from one another:
VantageScore Credit Scores
VantageScore is the scoring algorithm that Credit Karma uses and will give you a good indicator of your score across all three credit bureaus. These are the metrics used to calculate your score along with their overall value:
Payment History (40%)
The most critical factor in both formulas is whether or not you make your payments on time. Missing a single payment by more than 30 days can appear on your credit report for up to seven years.
There is nothing more important than being consistent and on time with all monthly payments.
Age/Type of Credit (21%)
A long history of diverse credit can help improve your score. Building credit will take time, so this aspect will only start to turn in your favor after several years of credit. It will also help if you have a mix of revolving credit lines (i.e., credit cards) and installment loans (mortgage, auto, student, etc.).
Credit Utilization Rate (20%)
This ratio is calculated based on your outstanding credit balances compared to your total credit limit. For example, owing to a total of $1,250 on three cards with a combined $5,000 limit would be a credit utilization rate of 25 percent.
The higher your ratio is, the more damage will be done to your score. You should keep your credit utilization rate around 10 percent and avoid going higher than 30 percent at all costs.
Total Balance (11%)
Total balance is merely the total amount of debt you have. Like the credit utilization rate, keeping your credit balances paid and low can help improve your score.
Recent Credit (5%)
Your credit report will need to be pulled anytime you apply for new credit. These “hard credit checks” are noted on your credit report and can be harmful if you rack up many of them quickly.
Available Credit (3%)
The total amount of credit that you have can help provide a minimal boost to your credit score. Requesting a credit limit increase on your current credit cards can help slightly boost your score.
FICO Credit Scores
FICO scores are typically what banks and financial institutions will look at whenever they are considering loan applications. These scores are calculated using the following information listed in your credit report:
Payment History (35%)
As with VantageScore, payment history is the single most crucial factor that makes up your credit score.
Amount Owed (30%)
A high credit utilization rate would indicate that you’re overextending yourself and potentially at risk of defaulting on payments.
Credit History (15%)
The age of your oldest credit account, newest credit account, and the average age of all your accounts make up this part of your score.
Credit Mix (10%)
Being able to maintain payments on multiple different types of credit and loans displays a solid commitment to repaying debts.
New Credit (10%)
Attempting to open several new credit accounts in a short time would indicate that you might be struggling and would be a greater risk to lenders.
When Does Credit Karma Update Credit Scores?
Updates from TransUnion and Equifax are usually available through Credit Karma every seven days. You’ll be able to see the exact date of your most recent score on the dashboard of the Credit Karma site or mobile app.
The original intention of Credit Karma was to help users easily monitor their credit scores. Any significant upswing or downshift can be crucial information to know. That’s why Credit Karma works tirelessly to ensure that your credit scores are as accurate and up to date as possible.
The only thing to remember is that the credit bureaus and lenders aren’t nearly as quick to update your account as Credit Karma. Generally, a lender will take around 30 to 45 days to report customer activity to a credit bureau.
Credit Karma only knows what the credit bureaus know, so it can take a little while before the positive or negative information is reflected in your score.
Why Are My Credit Scores Different?
- Different scoring models create different scores
- Scoring model versions can be outdated
- Each bureau has different information
- Your score hasn’t been updated
- There are errors in your report
Credit Karma provides you with your latest TransUnion and Equifax credit scores. It’s common for these two scores to differ by a few points. That’s not even mentioning your Experian and FICO scores which can be different by an even more considerable margin.
All four types of these credit scores are three-digit numbers, but that’s basically where their similarities end. These are a few reasons why your credit scores are different:
Different Scoring Models Create Different Scores
The two most common types of credit scoring models are VantageScore and FICO. These two algorithms require the same financial information, but the difference is how much weight is attached to each factor. A missed payment can be severe to one formula and less of an issue to the other.
Scoring Model Versions Can Be Outdated
The VantageScore and FICO scoring models constantly evolve as the algorithm grows more accurate. VantageScore 4.0 is the most up-to-date version of the scoring metric, but VantageScore 3.0 remains the most common.
The same is true for FICO, as FICO Score 8 is the most commonly used, but FICO Score 10 is the newest version.
Each Bureau Has Different Information
Credit reports are compiled based on information provided by the three major credit bureaus. The problem is that lenders aren’t required to report financial information to each bureau, and some will only report to one bureau.
In that case, a missed payment would only be known by one bureau, and the penalty would only be assessed to one of your scores.
Your Score Hasn’t Been Updated
Just because you access all of your credit scores on the same day doesn’t mean that each one is current. The bureaus update your credit score at different times and rates. A negative mark on your credit might have dropped off last week, but it might not be reflected in your score yet.
There Are Errors in Your Report
Credit reports are far from perfect representations and can often come with errors. There is a long list of reasons why an error can occur, but it can dramatically impact your credit score with the bureau involved.
If you’ve noticed that one of your scores is significantly lower than the others, it could be a sign of an error. You should immediately review your report and dispute any item you think is incorrect.
Improve Your Score With a Little Help
Credit Karma is an excellent tool that can help you keep a close eye on your credit report. While it won’t provide you with your current FICO score, it will provide you with your VantageScore.
You’ll also get recommendations about different ways to build up your credit. While there are plenty of ways to build up your credit, few of them offer the unique benefits of Yotta.
Yotta is a financial account service offering a unique set of benefits you won’t find in a bank. For starters, the Yotta Credit Card can help you build up your credit as each swipe is reported to all three credit bureaus.
You won’t have to pay any interest or fees when using the Yotta Credit Card, and your account balance is your limit. That means you can’t run up a large credit card debt, and it’s impossible to ever make a late payment.
But that’s not even the best part. Using the Yotta Credit Card will get you more entry tickets in the weekly sweepstakes drawing. Depending on how many numbers you match, you could win a cash prize that ranges between 10 cents and 1 million dollars. Improving your credit score can be much easier with that kind of cash on hand.
Visit Yotta today to create an account and make your first deposit. You can request a Yotta Credit Card and get to work improving your credit score. And who knows? You might win a large enough prize that you won’t need to rely on credit for a long time.
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