It seems too good to be true: Credit Karma will provide you with your credit score absolutely free. All you have to do is sign up at creditkarma.com, and you can see your credit score immediately. But everybody has heard the cliché, “You get what you pay for.” Is a free credit score really worth giving up your personal information, especially in an era when hackers are alarmingly successful at getting their hands on that personal data? Does the score hold up against what creditors would use to judge your creditworthiness? Here’s a look at what Credit Karma provides and whether it is worth using its credit score service.
The Credit Karma Model
Credit Karma, according to its website, believes that you have a fundamental right to know and view your credit score. Armed with this knowledge, you’re more likely to pay your bills on time and avoid going into collections for debt, and you might waste fewer resources of the companies with whom you do business. In other words, if you know your score, you’re better off and so are those companies because they don’t have to spend money and time trying to collect what you owe them. Everybody wins!
But it’s not entirely an altruistic effort. Credit Karma is a for-profit business. Sure, it is offering you something for free, but it is making money elsewhere.
The company’s revenue model for customers, posted online, reads: “When you access the free credit score, Credit Karma will show personalized offers to you based on your credit profile. These offers are from advertisers who share our vision of consumer empowerment. If you wish to take advantage of our offers, it is up to you. Credit Karma tries to give the power and the choice back to the consumer.”
Credit Karma makes its money in two ways. First, along with your credit score, it places advertisements on the page and hopes that you will respond to those ads. Second, because Credit Karma is pulling your credit score, its system knows a lot about you, and it can carefully tailor ads to your spending habits. More targeted ads are better for advertisers (they don’t waste money putting ads in front of people who would never use their services) and usually allow the advertising company to charge more per ad. With more than 40 million active users, Credit Karma has a healthy revenue model.
In sum, Credit Karma makes money by giving you a free score in exchange for learning more about you and charging advertisers to put ads in front of you.
Is Your Credit Score Accurate?
Now that Credit Karma’s motivation for offering free credit scores is clear, it’s possible to judge the quality of the scores. If its business model relies on you returning to the site often, offering you an accurate, legitimate score is good business for them.
Nonetheless, we asked Credit Karma, “With all of the different scores out there, why should consumers trust that Credit Karma is providing a score that can be relied upon as an accurate representation of their creditworthiness?”
“The scores and credit report information on Credit Karma come from TransUnion and Equifax, two of the three major credit bureaus,” said Bethy Hardeman, chief consumer advocate at Credit Karma. “We provide VantageScore 3.0 credit scores independently from both credit bureaus. Credit Karma chose VantageScore 3.0 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. In 2014, over 2,000 lenders, including six of the ten largest banks, used nearly one billion VantageScore credit scores to judge consumers’ creditworthiness.”
What Is the VantageScore?
You’ve probably heard of the FICO score, arguably the best known of the credit scores. It’s still the one that nearly every personal finance guru wants you to track. What many people don’t know is that FICO doesn’t actually collect your credit information. FICO creates a score by looking at your file from the three major credit reporting bureaus – TransUnion, Equifax and Experian.
VantageScore does the same thing as FICO – only differently. VantageScore notes that its scoring model was actually created by the major credit bureaus.
The scoring model is now on its third version (VantageScore 3.0) since hitting the market in 2006. One of its features, according to Credit Karma, is that it scores up to 30 million more people than other models and can score people with little credit history, known as a “thin” credit file.
Use of VantageScore increased 20% between July 2017 and June 30, 2018, according to a report from Oliver Wyman cited on the Vantage's website. Financial institutions pulled approximately 6.4 billion scores, the report states. However, more than 90% of lending institutions use the FICO score to make decisions, FICO reports. More than 10 billion FICO scores are purchased every year, according to the company – many more than VantageScore.
Which Credit Score to Follow
Whether or not you should invest a lot of time in figuring out which score is the best predictor of your credit is debatable. First, different lenders use different scores. You can’t predict which score they will pull. There are so many scoring models, there’s no practical way for you to keep track of – or even access – all of them.
Second, and probably more important, every 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’re rated a ‘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 2 of the big 3 credit bureaus, there’s a chance that your score might not be entirely accurate. For example, what 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 2 bureaus only knew 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 charge a large amount.
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 want an accurate picture of where you stand.
Third, some sites have reported that the Credit Karma score is within 1% of your FICO score. But then, the customer review site ComsumerAffairs.com has people reporting, among other things, that their Credit Karma score is quite a bit higher than their actual FICO score. Take customer reviews posted to a website with a grain of salt, but the number of these reports is worth noting.
Fourth, as we said already, although the Vantage 3.0 score 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 likely looking at your FICO score.
Finally, understand that 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 offers a product through VantageScore that works well for tracking your score. But whether 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.”