Why I Love/Hate Credit Karma

I love that there is a Credit Karma in the world today. Never before has the general public had such quick and easy access to their credit information. Not only does Credit Karma share credit scores with them, it gives them information on what is driving that credit score and steps they can take to potentially improve it. Yep, I love Credit Karma.

As a mortgage lender, though, I also kind of hate it. While it tells people their credit score, it's not the same credit score I'll be using for their loan application which regularly leads to disappointment for my clients.

So why isn't it the same score? Good question. Let me explain.

What Credit Karma Is

Credit Karma is a custom credit score calculated with the VantageScore scoring model. The VantageScore is a scoring model that was created by the three main credit reporting agencies (Equifax, Experian and TransUnion) back in 2006.

To clarify, a 'scoring model' is just a term for the way the math is done. These mathematical models are complex algorithms that look at all of the components of a person's reported financial picture (payment history, balances, collections, judgements, etc.) and calculate a number that lenders can use to determine just how high the risk is when they make a loan to a person.

While use of the VantageScore scoring model has been growing since its creation, it is still not the primary credit scoring system out there. The main scoring model out there today is the FICO score.

What Credit Karma Is Not

A Credit Karma score is not the same as a FICO score.  FICO has been around since 1989 and is the leader in the credit scoring arena for one primary reason - it is the model the banks have to use. In the mortgage arena at least, lenders are required to use a FICO score in their loan approval if they are selling their loan to Fannie Mae, Freddie Mac or FHA. Seeing most loans are sold to those entities, it's easier for mortgage companies to just use the FICO scoring system across the board.

Why This Is A Problem

The problem with this is that the VantageScore and the FICO calculations are different and they give the user different credit score numbers.  If a potential homebuyer gets a higher VantageScore from Credit Karma, they may think they're in good shape to buy a home. They then may go out and find the house they love and officially apply for their mortgage only to have the mortgage lender pull their FICO score and learn that they actually don't qualify.

Still, though...

Finding out that the information they were relying on was faulty can be heartbreaking for a potential homebuyer.  Still, though, Credit Karma can be an excellent tool when used in the right way.

The key is for a consumer to use Credit Karma to monitor movements, not the actual score. If someone is looking to buy a house, their first step is to talk to a mortgage lender and learn what their FICO score actually is. Then, if it's lower than needed, they should get their Credit Karma score and start taking the steps their lender recommended to improve their FICO.

As those steps take effect, the consumer should see their Credit Karma score moving up. This is a good indicator of what is happening with their FICO score as well.  Even though these scores are calculated differently, they are using the same data and movement in one is a good indicator of movement in the other.  Once the Credit Karma score has moved the number of points that the FICO needed to move, the consumer should check back with their mortgage lender and have them check again to see if they're where they need to be.

Bottom line, though, a Credit Karma score is just an indicator and shouldn't be used when figuring out if you can get a mortgage or not.  That question needs to go to your mortgage lender.  If you're looking to buy a house in Indiana or Michigan, I'd love for that mortgage lender to be me!  Feel free to contact me at lori.hiscock@ruoff.com if I can assist.

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182