I often see posts here that say something like “I paid off a loan and my credit score dropped X points! What gives?” And in the original post or the comments, more often than not the score in question is from CreditKarma. But here’s the thing: CreditKarma scores are hardly ever used by actual lenders to make decisions; pretty much only FICO (Fair, Isaac & Co.) scores are. CreditKarma scores have many of the same “ingredients” as FICO scores, but the mixture usually isn’t quite right.
The model used for CK scores is called VantageScore 3.0; you can think of it as a slightly “off-brand” credit score that lenders don’t typically care for. I wanted to talk about some of the more glaring differences between Vantage and FICO scores – if you’re applying for credit (and not just monitoring), having “the real thing” is helpful. You might eat Kraft American Singles on a sandwich at home, but you wouldn’t bring them for an hors d’oeuvre at a wedding, right?
- FICO scores consider ALL accounts (whether open or closed) in determining average account age; VantageScore includes only OPEN accounts. This is probably THE single biggest difference between the two models and the source of much of the frustration with CK that I see here. If you pay off an installment loan (like a mortgage, car loan, or student loan), the account gets closed. While FICO will still count it toward your average account age until it falls off, VantageScore won’t: the closed account immediately gets removed from the calculation, which might make your average account age fall and drop you a bunch of points!
- FICO models only count hard inquiries – i.e. credit apps – from the past 12 months even though they appear on your reports for 24 months. By contrast, CK’s VantageScore will penalize inquiries for the full 24 months, and (at least in my experience) there’s little to no reduction of that penalty as the inquiries age; a 23-month-old inquiry seems to hurt CK scores almost as much as a 23-minute-old one.
- With credit line utilization (the percentage of the credit limit owed as a balance) both overall credit balances and utilization at the individual account level matter. But FICO seems to count overall utilization more heavily, while VantageScore seems to be REALLY sensitive to individual account-level balances, to the point where just one account crossing a “threshold” might cause a large swing. In fact, I saw a post here today where someone wrote they lost 25 points (!) on CK when their overall utilization went from 1% to 4%, likely because an individual card crossed a threshold (even though this wasn’t directly stated). In FICO-world, since overall utilization matters more, that penalty would probably be much smaller.
- With negative entries – late payments, collections, etc. – it seems (from my research) that FICO scores penalize old negative items a bit more than CK scores do. I don’t have any negatives on my own report to use as a data point, but I’ve seen a common thread online where people are unpleasantly surprised to find their FICO scores much lower than CreditKarma, often because of older negative items. Although FICO scores do have some leniency for old negatives, make no mistake: they will still “hurt” for the full 7 years they show on your report! Edit: This may not be true in all cases as a blanket rule. In some cases, CK may score old negatives more harshly, probably depending on which FICO model you’re comparing against.
Now, a couple caveats. There are several dozen different versions of FICO scores, some old and some new, some generic and some industry-specific. There are FICO scores specifically for car loans and for credit cards, for example. And mortgage underwriting uses a pretty old FICO model (2004-ish). FICO scores aren’t a monolithic thing, in other words.
Also, CreditKarma can still be useful even though the scores it gives you aren’t “real.” CK is free (biggest plus!) and pretty decent for monitoring changes to your reports or giving you a rough idea where you stand in terms of credit risk. Above all, just don’t take CK as gospel; remember that they’re a marketing company first (by selling your data to lenders) and a monitoring service second.
tl;dr – CreditKarma scores aren’t the real credit scores used by lenders, much like Velveeta isn’t real cheese. Don’t pay too much attention to your CK “VelveetaScore” except as a rough guide.
Disclaimer: This is a guest post and it doesn’t necessarily represent the views of IWB.
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