As an investor—or future investor—few things are quite as important as your credit score. Granted, everyone wants to be a cash buyer, but most start out having to line up financing for their first deals. Unfortunately, this means facing the bank’s scrutiny and being at their mercy if your numbers are not solid. A lot of people just shove their heads in the sand and hope for the best. Nevertheless, some meet the potential obstacle head-on and delve into the world of credit reporting. Even those of us who think we have an idea of how things work, though, may not realize the term “credit score” may not mean what we think it means.
I like Credit Karma as much as the next guy. In fact, the app is downloaded on my phone. I check it religiously every seven days. However, did you know Credit Karma does not provide your actual FICO credit score? Instead, it provides what is known as a VantageScore.
How Your Credit Score Works
Basically, your financial and payment history is forwarded to credit bureaus. There are three well-known bureaus: TransUnion, Equifax, and Experian. There are others, but these are the primary consumer bureaus you can pull your reports from. A separate company, FICO (Fair Isaac Corporation, originally Fair, Isaac and Company), has an algorithm that reads the information on your credit reports and calculates your credit risk. This “risk” is quantified into your credit score. Depending on the type, this number may be between 300 and 850. There are actually multiple “FICO” scores, depending on the entity pulling the report and the purpose of the score being pulled, but currently the most common is the FICO 8. Some banks are moving toward FICO 9.
What is the VantageScore?
The problem with the FICO algorithm is no one knows what it is but FICO. Some guidelines have been provided, such as credit utilization accounting for 30% of your score, but no concrete formulas. Although you are entitled to a free copy of your credit report annually, you are not entitled to your credit score. To get your credit score, you either have to apply for credit or pay to get your score from a company. Some credit cards now provide your FICO score on statements as well (cough, Discover). A VantageScore, however, is a scoring model that emerged as a joint venture between the credit bureaus in 2006 that is more readily available. By downloading Credit Karma or looking at your Capital One statement, you can see your VantageScore.
Why Does It Matter?
Although the VantageScore is argued to compete with the FICO scoring model, very few financial institutions actually utilize it. More importantly, it can be VASTLY different from your FICO score! For example, about two weeks ago, I received an alert from Credit Karma that my TransUnion score dropped 80 points! I watch my credit score very carefully, so I knew something was not right. I logged in, and absolutely nothing negative had been added to my accounts. I patiently waited for the date my FICO score would become available through a website I use. The outcome? My TransUnion score went up nine points! Currently sitting at an 89 point difference, the FICO score would land funding, while the VantageScore would get me laughed at.
Related: Why Credit Scores Matter & How to Improve Them
Moral of the Story
Websites like Credit Karma absolutely have their place. It really works great to keep an eye on how your financial accounts are being reported. However, to get the real dirt, you need to download your reports and get your FICO scores from each bureau. This is especially important if you plan to get a mortgage at any time in the future. Without providing a shameless plug, there is currently a company that even provides FICO mortgage scores, which were once a sacred commodity of mortgage lenders. People often ask how to get started as an investor. Figuring out where your credit score is and how to maximize it is at the top of that list.
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