That’s the question many Twitter
users were asking this week, after scores of tweets about the personal-finance management company went viral. Many of these tweets centered on a common theme — that the credit scores Credit Karma
presents are lower than what lenders see.
One Twitter user compared Credit Karma to “the enabling friend that sugar coats everything,” while others accused the company of lying.
Of course, not everyone had this exact experience. Some people noted that their score on Credit Karma was actually lower than the score provided to them by their credit-card company. How can this be?
It’s a common misconception that there is one, singular credit score for each consumer. “Most people would seriously be stunned if they knew just how many credit scores there are,” said Matt Schulz, chief credit analyst at LendingTree
In fact, there are two broad categories of credit scores: FICO scores and the VantageScore. Of the two, FICO
is the more famous — it was created by a company originally known as Fair, Isaac and Co. in the 1950s. The base FICO score ranges from 300 to 850, although industry-specific scores can range from 250 to 900. Based on where a consumer falls in that range they will be considered to poor to exceptional credit, with higher numbers representing better credit.
VantageScore was created by the three major credit bureaus — Experian
— as a competitor to FICO in 2006. While it uses a different algorithm than FICO, the information used to produce the score is the same. That’s because both FICO and VantageScore rely on consumer data from the credit bureau to produce their scores. Also like FICO, the VantageScore uses the same range, from 300 to 850, to gauge a person’s creditworthiness.
But it gets even more complicated than that. There’s not one single FICO score or VantageScore — there are multiple versions of each that have been released over the years. It can help to think of these scores like computers, said Ted Rossman, industry analyst at CreditCards.com.
“Some people have PCs and others have Macs,” Rossman said. “And
even within PCs, for example, you might be running Windows 10 or Windows 8 or
Windows 7, etc.”
Over the years, both credit-scoring firms have released new iterations of their scores in an effort to provide a more accurate, holistic picture of a consumer’s financial behavior.
Last year, FICO released two new credit scores, the FICO Score 10 and the FICO Score 10 T. Among the changes made to these new models were a different approach to weighting personal loans and the incorporation of so-called “trended data” to provide a sense of a borrower’s financial trajectory.
‘The credit score you see on financial tools and apps is what’s considered an ‘educational’ score.’
Lenders don’t necessarily use the latest versions of credit scores. For instance, the Federal Housing Finance Agency has specific credit-score requirements for the loans that Fannie Mae
and Freddie Mac
back. For these mortgages, lenders can only use FICO Models 2, 4 and 5. Plus, lenders will look at more than just your credit score — they’ll dig into your credit report to identify potential red flags or find explanations for why your score may have dropped or risen.
“Mortgage lenders usually pull FICO scores from
all three bureaus — and like the Olympics, they throw out the highest and
lowest scores,” Rossman said. “A credit card or auto lender, on
the other hand, might just check one. Which bureau and which version can vary
Credit Karma uses VantageScore 3.0 for the information it
provides to its users, a company spokesperson said.
“The credit score you see on financial tools and apps is what’s considered an ‘educational’ score,” said Sara Rathner, credit-card expert at personal-finance website NerdWallet. “It’ll give you a general sense of where you stand, but don’t take it as gospel.”
As for why credit scores vary from version to version or
lender to lender, that comes down to the underlying data used to produce the
scores. The FICO Model 2 used in mortgage lending, for instance is produced by
Experian based on the data that Experian receives from lenders on how much debt
borrowers owe, whether they’re paying it on time, etc. But lenders don’t always
report that information to all three bureaus.
Newer versions of FICO and VantageScore will also incorporate data such as people’s history of paying their rent and utilities on time. Again, not all landlords and utility providers send that information to the bureaus.
“The difference in scores can be really frustrating, because
a lower than expected score can mean a more expensive loan,” Rathner said. “This
is definitely something that makes it harder for consumers to make informed
The good news is that the efforts people make to improve their scores should improve their scores across the board. Making on-time payments and avoiding maxing out your limit on credit cards are great starting points.
And in cases where two scores do differ substantially, that
could be an indication of an error on your credit report. Consumers can get one
free copy of their credit report from each of the three credit bureaus every
year to keep tabs on what lenders are seeing. “A quick decrease for no apparent
reason can be a sign of identity theft and is important to address in a hurry,”