How Credit Scoring Works
Smart consumers know their credit score affects their ability to get a loan, their mortgage rates, credit card approvals, and even a job or housing application. So it’s a good habit to review your credit report and score frequently – not only for accuracy but also to identify ways to could improve your score.
Federal law mandates that everyone has the right to one free credit report from each of the big three credit-reporting companies – Equifax, Experian, and TransUnion – every 12 months. To obtain a copy, consumers have to apply through AnnualCreditReport.com, the official credit-report site. But these reports don't include your credit score, which is an important financial figure everyone should know. In the past, the only way to obtain it was by purchasing the score directly from each agency, which often came at a hefty price.
Understanding Credit Karma's Role
Credit Karma, a San Francisco–based company founded in 2007, has shaken things up by offering free, ongoing access to your credit scores and reports from TransUnion and Equifax. You sign up with creditkarma.com and do not have to register a credit card as is often the case with other sites.
Once you’re a member, you can track your credit as often as you like. Credit Karma also provides free online tools and information to help you understand your score. The service also provides personalized tips to improve your score, including reducing your credit utilization or improving your on-time payments.
Why Make All This Free?
Credit Karma has made transparency central to its business model. The company aims to demystify credit for the average person and make it easy to understand.
“The company was founded with the belief that consumers should have access to their data for free,” according to a spokesperson. “After all, it is their data, and they’re judged by it in nearly every facet of their lives.”
Another part of the mission is helping people understand their own financial health.
“Scores were built for lenders and statisticians,” Credit Karma founder and CEO Ken Lin said. “Consumers were not the intended audience.”
So What’s the Business Model?
Since Credit Karma is a for-profit business and not a charity, how does it make money? Rest assured, it is not selling the information you share in order to get your credit reports from its site. According to the company website, its revenues come from tailored, targeted advertising by financial companies on creditkarma.com. Its business model is based on finding a win for everyone – the consumer, the financial institutions that advertise products and Credit Karma’s own bottom line.
Credit Karma has more than 85 million members as of Jan. 2019, the most recently-available statistic. It has the ability to do robust analysis and use algorithms to select relevant ads for specific people. To financial advertisers, this means the site is better able to match them with consumers who are more likely to use their services. Credit Karma gets paid for this lead generation based on agreements with its financial advertising partners.
Here’s How It Works
By accessing your credit reports, Credit Karma suggests credit products based on your current history. It also uses your credit score and history to determine which products — credit cards, loans, insurance, and other banking products – come with high approval odds.
“If you take advantage of that opportunity, we should make money, you should save money, and the bank should get a new customer,” Lin said in a December 2014 Reddit Q&A. “The loser in the equation was that bank that was charging too much.”
The Bottom Line
Credit Karma is an online personal-finance platform that promises to take the guesswork out of credit. It allows you to monitor your credit reports and scores for free and offers other tools and services based on your profile. The company gets compensated by matching consumers with tailored product ads that are based on their credit profile and the likelihood that they will be approved.