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.

Transcript

Philip: 0:00

Welcome to the loan pros podcast, where we help make you a more informed homebuyer today. I'll be talking about what is a credit score and is credit karma accurate. A credit score is a number that represents your credit. Worthiness. This number is generated from the information in your credit report. The higher, the score, the less likely you are to miss payments or default on your loans and obligations. The five main factors that make up most credit scores are payment history. Credit utilization. Length of credit history. Uh, credit mix. And new credit accounts. That first one 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 credit score will be. The second is 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. The third is length of credit history. The longer your credit history, the better. This shows that you've been able to handle debt responsibly over time. The fourth is credit mix. A, diverse credit mix is considered positive by lenders. This means that you have experienced with different types of loans, such as mortgages, car loans. And credit cards. The last number five is 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 annual credit report.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. Uh, 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 vantage score solutions. Which is the credit scoring model used by an increasing number of lenders. However, mortgage lenders do not usually use this model. My fico.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 mortgage lenders are using. So let's say we're going to take a look at credit karma. How accurate is it? Credit karma currently uses the vantage score. 3.0 model to generate at scores, which is a widely used scoring model for credit monitoring because each lender has its own criteria for proving grounds. Your score and credit karma may not perfectly align with a score. A lender would use to evaluate your loan application. Its accuracy varies heavily on the type of trade lines or what's in your credit report. and how long ago they were reported, as well as the type of loan that you're 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 shorter credit history, Or you've had some recent, late payments. Your score may be less accurate. If you're applying for a home loan credit karma uses a completely different weighing and criteria system. So the score can vary much more 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 home loan. When it comes to mortgages, credit karma may not be the best option. And this is because mortgage lenders use a different scoring model than the one used by credit karma. So your scores, aren't going to match up. Exactly. In the U S mortgage lenders use FICO scores in 90% of lending decisions. So how does FICO compare to vantage score? there's a few key differences between FICO scores and vantage scores. And one is that FICO scores. Consider tax liens and public records while vantage scores do not. Additionally, the scoring models use different weighing systems for the various credit factors. So for example, your payment histories were 41% with vantage score three while FICO's at 35%. The age of your credit profiles, 21% with vantage score three 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 and use while vantage score has for 1.02, three and four. The version that's used by a lender will depend on which model they're using and what type of loan they're applying for. There are also industry specific scoring models that tailor the score to emphasize those types of 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 things like credit cards, our 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 a 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's great place to start. Now that you have an idea of where your credit's at, do you need a good credit score to get a mortgage? Do you need a perfect 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 just one of the factors in their decision making process. the higher your score, the lower your interest rate and the better your loan terms. Some examples of minimum credit scores by loan types are for conventional loans. A six 20 score. For an FHA loan, a five 80 score. For VA loan for veterans, there's actually no minimum score, but most lenders are going to prefer at least a five 80 score. For all loans, the higher your credit score, the better. A higher credit score means your 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 example on an FHA loan, the minimum down payment is typically three and a half percent, but you're going to need at least a five 80 credit score to qualify for that. If you're between five hundred and five seventy nine, you may still be able to qualify, but you're going to have to put 10% down. A higher credit score. I may also allow you to have a higher DTI or 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 with some lenders, As high as 55%. This gives you much 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 score and get an idea of where you stand. However, it's not perfect. And your score will be different than what mortgage lenders use. Uh, mortgage lenders are using FICO scores. So it's always best to check with them directly. See what they're looking for and have them run your credit. You'll need a good credit score to get favorable interest rates and loan terms on a mortgage and better credit scores can not only give you better interest rates. But more buying power. I hope this helps make you a more informed buyer. Thank you.