Mismanaging your credit is a surefire way to end up in the financial doghouse. Trying to make that leap into real estate, the car rental industry, or any business idea without a sustainable line of credit is making the game hard on yourself. The U.S credit system is designed for you to take advantage if you’re willing to spend enough time to learn. Lower credit scores lead to major purchases like cars or homes becoming pocket drainers over time because of higher interest rates.
In the past few BWR blog posts, we’ve been going over credit and why establishing healthy lines of credit is in your best interest going forward. Topics on why establishing healthy lines of credit is important, how to give your child an 800 credit score, and even how the credit bureaus determine your credit score. Today, we’ll be revisiting the latter to understand the difference between where your scores come and which scores matter the most depending on the purchase.
Do you have bad credit? Well it's never too late to change that but first let's go through what how the credit bureaus determine your score
THE FIVE FACTORS OF CREDIT pic.twitter.com/5VNfFzyOX7
— Black Wealth Renaissance (@BWR_Movement) December 29, 2019
The Fair Isaac Corporation, FICO, was originally a data analytics company focused on credit scoring and managing consumer risk. Consumer risk is simply the likelihood of a consumer to default on a loan. This data helps lenders evaluate creditworthiness for borrowers when it comes time for a major purchase. The first FICO scores were used to gauge which homeowners qualified for mortgages.
FICO and VantageScore are two companies that develop credit monitoring software which is able to generate a credit score for the credit bureaus. FICO is a well-known name when you ask someone about credit and around 90% of major lenders use FICO scores to determine customer risk. But according to a study by Oliver Wyman, 2,500 businesses reviewed around 12.6 billion scores with the VantageScore scoring method; In 2018 to 2019 the year-by-year usage rating of VantageScore by lenders rose by 20%.
Fico and VantageScore scores are calculated differently in inquiries, utilization, and open credit trade lines. If more lenders take on the VantageScore method it’ll affect how much you can qualify for in student loans, bank loans, auto loans.
10% Credit Inquiries/New Credit
10% Types of Credit/Credit Mix
15% Age/Length of Credit History
30% Level of Debt/Amounts Owed
35% Payment History
The VantageScore credit scoring model is a joint data resource realized through Experian, TransUnion, and Equifax linking up to form VantageScore Solutions, LLC, in 2006. While the FICO scoring model is custom made for each of the three credit bureaus, the VantageScore model allows scoring to occur with a single model from the bureaus. Your VantageScore is a direct link to your credit history over time as opposed to the FICO score being represented in different scoring models.
3% Available Credit
5% Recent Credit History
11% Total Balances/Debt
20% Percent of Credit Used
21% Age and Type of Credit
40% Payment History
View this post on Instagram
Credit Karma is a reliable free resource for those people that want an “estimate” of what they think their credit score is. This system lets users view their reported credit score from the bureaus for free whenever they please. Sounds too good to be true right?
Credit Karma in actuality only relies on reports from Equifax and TransUnion, leaving out crucial credit information that may affect how you view your score. The score Credit Karma gives you and the score that lenders see when you propose a loan are two totally different scoring methods. Your overall score from Credit Karma won’t change instantly without filing a credit report to the bureaus.
Once you understand how your score is truly calculated, the need to rely on Credit Karma for credit score information will no doubt experience a decline.