Credit Karma's promise is to provide you with your credit score for free. But is a free credit score really worth giving up your personal information, especially at a time when hackers have proven themselves to be very successful at getting their hands on personal data? How does Credit Karma's score compare to what creditors would use to judge your creditworthiness?

Credit Karma's website purports that every person has a right to know their credit score; with the knowledge of their credit score, individuals are more likely to pay their bills on time and avoid going into collections for debt. And ultimately, this creates a more efficient system because consumers waste fewer resources of the companies with whom they do business.

Key Takeaways

  • Credit Karma 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.
  • The scores and credit report information on Credit Karma comes from TransUnion and Equifax, two of the three major credit bureaus.
  • Credit Karma provides VantageScore credit scores independently from both credit bureaus.
  • Because Credit Karma uses only two of the three major credit bureaus, a consumer's credit score might not be entirely accurate.
  • Although VantageScore's system is accurate, it’s not the industry standard; the companies that will approve or deny loan applications are more likely to look at FICO scores.

How Credit Karma Makes Money

However, Credit Karma's model is not entirely altruistic. Credit Karma 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. Along with your credit score, Credit Karma places advertisements in front of consumers, hoping that they will respond to them by clicking on them. 

Because Credit Karma is pulling your credit score, its system can learn a lot about you, and can carefully tailor advertisements to your spending habits. Targeted advertisements are more appealing for companies since they are not wasting their money putting advertisements in front of people who would never use their services. In addition, targeted advertisements usually allow the advertising company to charge more. With more than 60 million active users, this is a healthy revenue model for Credit Karma.

Is Your Credit Score Accurate?

Credit Karma's business model is reliant on consumers returning to their site often, so offering accurate, legitimate scores is in their best interest. Investopedia reached out to Credit Karma, asking 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.”

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 consumer credit information. FICO creates a score by looking at your file from the three major credit reporting bureaus: TransUnion, Equifax, and Experian. VantageScore follows the same process as FICO, except that its scoring model was actually created by the major credit bureaus.

The scoring model is now on its fourth version, called VantageScore 4.0, which was launched in 2017. VantageScore claims to score 30 million more people than other models and can score people with little credit history, otherwise known as having a “thin” credit file. 

Although both the FICO Score and VantageScore use a credit range of 300 to 850, there are some key differences in how the two scores are calculated. FICO gives more weight to a consumer's payment history, while VantageScore emphasizes total credit usage and balances.

FICO vs. VantageScore

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. Additionally, there are so many scoring models and no practical way for you to keep track of or access all of them. Most importantly, every credit score is likely in the same range.

“It can be surprising to know that there are potentially hundreds of credit scores,” says Hardeman. “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

First, because Credit Karma uses only two of the three major credit bureaus, your score might not be entirely accurate. For example, consider what would happen if you transferred your credit card balance to a card with a lower interest rate, and only Experian recorded that one card was closed during the transfer. The other two bureaus only recorded that a new card was opened and now has a balance. This could significantly ding your credit score because it appears that you opened a new card and charged a large amount.

Credit Karma doesn’t hurt an individual’s credit score because it counts as a self-initiated inquiry, which is a soft credit inquiry—versus a hard inquiry. 

Second, Credit Karma only updates its scores once per week. For most people once per week is plenty, but if you’re planning to apply for credit in the near future, you may need a more timely update. On the customer review site ConsumerAffairs.com, some people have reported that their Credit Karma score is quite a bit higher than their actual FICO score. Whether or not these public reviews are reliable is debatable but it is worth noting the number of reviews that pay heed to this trend.

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. Last, Credit Karma’s business model is to earn commissions off loan products you purchase through its site. Although the site positions itself as a trusted adviser, its motivation is to sign you up for new loans. Overuse of credit can have financially catastrophic results. Use Credit Karma to monitor your score–not to received unbiased advice.

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. It works well for tracking your score. Whether or not you use that information is up to you. 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.”