Credit Karma promises to provide you with your credit score and credit report for free. But, how accurate and reliable is this information? Is Credit Karma giving you precisely the same information that a lender can access if you're applying for a mortgage or a car loan? And, for that matter, is it giving you anything you can't get elsewhere?
First, you need to know what Credit Karma is and what it does, and how its VantageScore differs from the more familiar FICO score.
- Credit Karma gives you a free credit score and credit report in exchange for information about your spending habits. It then charges companies to serve you targeted advertisements.
- The scores and credit report information on Credit Karma come from TransUnion and Equifax, two of the three major credit bureaus.
- Credit Karma compiles its own VantageScore based on that information.
- Your Credit Karma score should be the same or close to your FICO score, which is what any prospective lender probably will check.
- The range of your credit score (such as "good" or "very good") is more important than the precise number, which will vary by source and edge up or down often.
What Is Credit Karma?
Credit Karma is best known for its free credit scores and credit reports. However, it positions itself more broadly as a website that offers its users "the chance to build a better financial future."
To use Credit Karma, you have to give it basic personal information, usually just your name and the last four digits of your Social Security number. With your permission, Credit Karma then accesses your credit reports, compiles a VantageScore, and makes it available to you.
VantageScore or FICO: Does It Matter?
VantageScore is not FICO, for Fair Isaac Corp. They are the two biggest competitors in the business of creating scoring models that are used to rate the creditworthiness of consumers. To complicate matters, both update their models occasionally, and lenders use different versions with slightly different results.
You don't have a credit score. You have many credit scores, each calculated by a lender based on one of many models or versions of models. The important thing is, they should all be in the same range, such as "good" or "very good."
Your score should be roughly the same on either model. One model may put slightly more weight on unpaid medical debt. One may take longer to record a loan application. But if your credit is "good" or "very good" according to one system, it should be the same in the other.
What Else Credit Karma Offers
Credit Karma will access your credit information from TransUnion and Equifax, two of the three major consumer credit agencies. (The third is Experian.) It will come up with its own independent rating based on VantageScore. You will then receive your current VantageScore rating and the more detailed credit reports behind it.
More Credit Karma Services
But, besides this free service, Credit Karma has other related services, including a security monitoring service and alerts for new credit checks on you. Outside of Credit Karma, many of the best credit monitoring services provide similar alerts and services.
And, once it has your personal information, you can search for personalized offers for a credit card, a car loan, or a home loan, and your search won't pop up in your credit report on Credit Karma or anywhere else. A standard section of credit reports is "inquiries," which lists requests for your report from lenders you've applied to for a loan.
Credit Karma also offers personalized recommendations on money management. (Example: "Your car loan is 16%. You might be Overpaying!")
Who Runs Credit Karma?
Credit Karma is a multinational company founded in 2007 by Kenneth Lin, Ryan Marciano, and Nichole Mustard. Today, Lin is chief executive officer, Marciano is chief technology officer, and Mustard is chief revenue officer.
In December 2020, Intuit, the company behind TurboTax, closed the acquisition of Credit Karma in a deal valued at $8.1 billion including cash and stock.
100 Million +
The number of users worldwide that Credit Karma claims.
How Credit Karma Makes Money
Credit Karma's business model is not entirely altruistic. It is a for-profit business that makes money by giving you a free credit score in exchange for learning more about your spending habits and charging companies to serve you targeted advertisements.
Credit Karma places advertisements in front of its users, hoping that they will respond to them by clicking on them. Many of these advertisers are lenders, and Credit Karma may earn a fee if you apply through one of its links.
Your personal data is valuable stuff to advertisers, and they pay more to target it. With more than 100 million users, this is a healthy revenue model for Credit Karma.
Is Your Credit Karma Score Accurate?
Investopedia reached out to Credit Karma to ask why consumers should trust Credit Karma to provide them with a score that is an accurate representation of their creditworthiness.
Bethy Hardeman, chief consumer advocate at Credit Karma, responded: “The scores and credit report information on Credit Karma comes from TransUnion and Equifax, two of the three major credit bureaus. We provide VantageScore credit scores independently from both credit bureaus. Credit Karma chose VantageScore because it’s a collaboration among all three major credit bureaus and is a transparent scoring model, which can help consumers better understand changes to their credit score.”
Credit Karma isn’t a credit bureau, meaning they don't gather information from creditors. The credit scores and reports you see on Credit Karma reflect your credit information as reported by TransUnion and Equifax, two of the major consumer credit bureaus. These scores are not estimates of your credit rating, which makes them accurate and reliable.
What Is VantageScore?
While the FICO score is arguably the best-known credit score (and the one that nearly every personal finance guru will advise you to track), many people don’t know that FICO doesn’t actually collect information. FICO is a model used to create a score by looking at your files from the three major credit reporting bureaus.
VantageScore follows much the same process, except that its scoring model was actually created by the credit bureaus. Although VantageScore is less known to the public, it claims to score 30 million more people than any other model. One advantage is that it scores people with little credit history, otherwise known as having a “thin” credit file. If you're young, that could be important.
FICO vs. VantageScore: Which Is Better?
VantageScore and FICO are both software programs that are used to calculate credit ratings based on consumers' spending and payment history. FICO, for Fair Isaac Corp., is the older and better-known model, having been introduced in 1989. VantageScore, released in 2006, was developed by the three leading consumer credit agencies, Experian, Equifax, and TransUnion.
Because they are different models, your VantageScore will inevitably be a little different from your FICO score. For that matter, you may get a different FICO score from various sources at any given time, depending on whether the source uses a specialized variety of FICO or the most-often-used base model, and which of its many versions is used.
The key point is, your score should be in the same range on any or all of those models. You should not have a "good" VantageScore and only a "fair" FICO score.
The differences are relatively minor:
- VantageScore is designed to keep track of new or infrequent credit users. This can be an advantage to young adults, or to anyone who for any reason has dropped off the consumer radar for a time.
- When you apply for a new loan, your credit rating gets dinged. Consumer protection law requires that multiple applications be treated as one query so that you don't get dinged multiple times for comparison shopping. Since the two rivals handle these queries a little differently, VantageScore may ding you a little more than FICO.
- Both compile a credit score at the moment it is requested. The FICO system relies on current information as it is reported to the credit bureaus. The VantageScore system incorporates information on your spending behavior over the past two years.
The Chief Similarity
Both FICO and VantageScore have the same straightforward goal: To predict the likelihood that a consumer will default on a debt sometime in the next 24 months.
And that's why you shouldn't get too fussed about the differences. Every one of your credit scores should be in the same general range, but they'll never be identical.
Different lenders use different scores. Because you can’t predict which score they will choose, it may not matter which score you rely on–FICO or VantageScore. There are many other scoring models and no practical way for you to keep track of or access all of them.
Which Should You Check Regularly?
Credit Karma's Hardeman recommends picking one and sticking with it. “It can be surprising to know that there are potentially hundreds of credit scores,” she says. “However, credit scores are highly correlative. That means if you rated ‘good’ in one scoring model, you most likely have a ‘good’ credit rating in all other models. Whether you’re building your credit from scratch, working on bouncing back after a hardship, or just in maintenance mode, I recommend tracking one score for changes over time.”
Credit Karma Limitations
The first question is whether you need Credit Karma's services, free or not. And that may depend on how urgently you need detailed information on your credit status. Remember:
- You have a legal right to a copy of your credit score and credit report from each of the three credit bureaus once every 12 months.
- Many banks and lenders offer account holders access on-demand to their credit scores. For example, if you have an American Express card, click on Account Services to view your FICO score and your FICO history.
That's enough for most of us most of the time. If you're about to apply for a mortgage, or you're working to improve your credit rating, or you want the related services Credit Karma offers, you may want this access to your credit report and to the related services the company offers.
Your FICO Score May Differ
Credit Karma uses two of the three major credit bureaus and scores your creditworthiness according to the widely-used (but not quite as widely used as FICO) VantageScore system. Your score should be within the same range as everywhere else, including the major credit bureaus and its many competitors.
On the customer review site ConsumerAffairs.com, some people have reported that their Credit Karma score is quite a bit higher than their FICO scores. Whether these posts are reliable is unknown, but it is worth noting.
If your Credit Karma score isn't accurate, the problem is probably elsewhere. That is, one of the bureaus made an error or omitted information. Or, the information might have been reported to one bureau but not others.
Using Credit Karma won't hurt your credit score. Your search is a self-initiated inquiry, which is a "soft" credit inquiry, not a "hard" inquiry.
Your Credit Karma Score May Be Insufficient
Credit Karma updates its scores once per week. For most people that's plenty, but if you’re planning to apply for credit in the near future, you may need a more timely update.
Although VantageScore's system is accurate, it’s not the industry standard. Credit Karma works fine for the average consumer, but the companies that will approve or deny your application are more likely to look at your FICO score.
Credit Karma May Encourage Borrowing
Credit Karma’s business model is to earn advertising revenue and commissions from loans you get through the site. Although the site positions itself as a trusted adviser, it is motivated to sign you up for new loans.
Use Credit Karma to monitor your score—not to get advice on whether you should take on new debt.
Is Credit Karma Really Free?
Yes. Credit Karma will not charge you any fees. You can apply for loans through the site, and the company will collect a fee if you do.
Is It Safe to Use Credit Karma?
Yes. Credit Karma uses 128-bit encryption, which is considered nearly impossible to crack, to protect its data transmission. It also vows not to sell your information to third parties.
Does Credit Karma Hurt Your Credit?
No, using Credit Karma doesn't hurt your credit. When you access your information on Credit Karma, it counts as a "soft" inquiry that isn't reported to the credit bureaus. A "hard" inquiry, such as a lender's credit check when you apply for a loan, is reported.
How Many Points Off Is Credit Karma?
The only possible answer is, a few if any. Your credit score can vary every time it is calculated depending on whether the VantageScore or FICO model is used, or another scoring model, and even on which version of a model is used. The important thing is, the number should be in the same slice of the pie chart that ranks a consumer as "bad," "fair," "good," "very good," or "exceptional." (Even the words on the pie chart can vary slightly.)
Why Is My Credit Karma Score Different From My FICO Score?
VantageScore and FICO are the two big rivals in the credit rating business. Credit Karma uses VantageScore. Their models differ slightly in the weight they place on various factors in your spending and borrowing history.
The Bottom Line
Millions of people use Credit Karma to track their credit score. The company is highly transparent and provides its services through VantageScore. Thus, it offers a reliable snapshot of your current credit status.
The credit scores are updated only weekly, but that's sufficient for most people most of the time.
In fact, that weekly check may be particularly valuable to consumers who are working on repairing their credit rating, for young consumers building a credit rating for the first time, and for loan shoppers anxious about their own creditworthiness.
You can also use Credit Karma to spot inaccuracies in your credit report. As Hardeman advises, “Stay proactive and monitor your credit regularly so you can catch inaccuracies or fraudulent information. Make sure you dispute these inaccuracies before applying for credit.”
Keep in mind that you have other free options to use instead of Credit Karma or in addition to it. Your credit card issuer or bank may offer an update online. And, you have a legal right to a full copy of your credit report once a year, available at annualcreditreport.com.
Credit Karma can also help you research loan products. If you're in the market for a loan, having a recent credit score and current credit offers in one place can be a valuable service.
Don't forget that these offers are Credit Karma's bread-and-butter. Its advertisers are eager to lend you money, and that may not be the best thing for your credit score.