Credit Karma promises to provideyou withyour accuratecredit 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.
Key Takeaways
- 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 with targeted advertisem*nts.
- The scores andcredit reportinformation on Credit Karma come from TransUnion and Equifax, two of the three majorcredit bureaus.
- Credit Karma compiles its own accurate 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 will probably 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 the company 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.
The score range for Credit Karma's credit score is between 300 and 850. Their credit ratings are broken into three types, as follows:
- Poor: 300 to low 600s
- Fair to good: Low 600s to mid 700s
- Very good and excellent/exceptional: Above mid 700s
Is Credit Karma Accurate?
Though theFICO score is arguably the best-known credit score (and the one that nearly everypersonal financeguru will advise you to track), many people aren't aware that FICO doesn’t collect information. FICO is a model used to create a score by looking at your files from the three majorcredit reporting bureaus.
Credit Karma's VantageScore follows much the same process, except that its scoring model was 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 littlecredit history, otherwise known as having a “thin” credit file.If you're young or have recently come to live in the U.S., that could be an important factor.
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.
The credit scores and reports you see on Credit Karma come directly from TransUnion and Equifax, two of the three major consumer credit bureaus.The credit scores and reports you see on Credit Karma should accurately reflect your credit information as reported by those credit bureaus.
Credit Karma VantageScores
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, the former chief consumer advocate at Credit Karma, responded: “The scores andcredit reportinformation on Credit Karma comes from TransUnion and Equifax, two of the three majorcredit 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.”
VantageScore or FICO: Does It Matter?
VantageScore is not FICO. FICO stands for Fair Isaac Corporation, the biggest competitor 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.
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.
VantageScore and FICO are both software programs that calculate credit ratings based on consumers' spending and payment history. FICO 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 frequently used base model and which of its many versions is used.
The key point is that 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.
Key Differences Between FICO and VantageScore
The differences between the FICO score and VantageScore are relatively minor:
- VantageScore is designed to keep track of new or infrequent credit users. This can be an advantage for 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, the lender checks your credit rating. Consumer protection law requires that multiple applications are treated as one query so that you don't get dinged multiple times for comparison shopping. Because the two rivals handle these queries a little differently, VantageScore may ding you a little more than FICO will.
- 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.
Similarities Between FICO and VantageScore
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 worried 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 accessall of them.
You don't have just one 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."
Other Services Offered by Credit Karma
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.
In addition to this free service, Credit Karma has other related services, including a security monitoring service and alerts for when someone has conducted a credit check on you. This is not unique to Credit Karma: Many of the best credit monitoring services provide similar alerts and services.
When you share your personal information with Credit Karma, 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 allows you to limit the number of inquiries you make.
Credit Karma also offers personalized recommendations on money management. (Example: "Your car loan is 16%. You might be overpaying!")
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 advertisem*nts.
Credit Karma places advertisem*nts 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. Credit Karma has more than 100 million users it can charge companies to target with ads.
Credit Karma Drawbacks and 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 on-demand access 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.
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
Your credit scores can change daily on Credit Karma. It largely depends on when your lenders report to the credit bureaus. You can now check your daily TransUnion credit score on Credit Karma.
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, and 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.
Does Credit Karma Use FICO?
No. However, the credit score Credit Karma provides will be similar to your FICO score. The scores andcredit reportinformation on Credit Karma come from TransUnion and Equifax, two of the three majorcredit bureaus. Your scores can berefreshed as often as daily for TransUnion and weekly for Equifax, withalimited number of members gettingdaily Equifax score checks at this time.
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.
Why Are My Credit Karma and My FICO Scores Different?
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.
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 it is everywhere else, including with the major credit bureaus and its many competitors.
On the customer review site ConsumerAffairs, some people have reported that theirCredit 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.
Who Owns Credit Karma?
Credit Karma is a multinational company founded in 2007 by Kenneth Lin, Ryan Graciano, and Nichole Mustard. Today, Lin is chief executive officer, Graciano is chief technology officer, and Mustard is chief revenue officer.
In December 2020, Intuit, the company behind TurboTax, closed the acquisition of Credit Karma for approximately $3.4 billion in cash and 13.3 million shares of Intuit stock and equity awards with a total value of $4.7 billion.
The Bottom Line
Millions of people use Credit Karma to track their credit scores. The company is highly transparent and provides its services through VantageScore. Thus, it offers a reliable snapshot of your current credit status. 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 there are other free options 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, a service that provides you with a recent credit score and current credit offers in one place can prove valuable. 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.
Credit Karma is a widely recognized platform offering free credit scores and reports, leveraging data from TransUnion and Equifax, two major credit bureaus. It's crucial to understand Credit Karma's structure: it collects your information, generates a VantageScore (distinct from FICO), and monetizes its services through targeted advertisem*nts, emphasizing its goal of assisting users in building a stronger financial future.
Let's break down the key concepts covered in the article:
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Credit Karma Basics:
- Provides free credit scores and reports in exchange for user information.
- Utilizes data from TransUnion and Equifax to compile VantageScore.
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Accuracy of Credit Karma:
- Relies on VantageScore, a scoring model developed by the three major credit bureaus.
- The scores and reports should accurately represent your credit information from the bureaus.
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VantageScore vs. FICO:
- VantageScore, though different from FICO, aims to predict creditworthiness similarly.
- While different, both models usually place scores in the same general range.
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Differences Between FICO and VantageScore:
- VantageScore tracks new or infrequent credit users, potentially advantageous for specific demographics.
- Vary in how they handle credit inquiries and the time frame for information incorporation.
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Similarities Between FICO and VantageScore:
- Both models predict the likelihood of defaulting on debt in the next 24 months.
- Despite variations, scores from different models should generally align.
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Other Services Offered by Credit Karma:
- Accesses credit information from TransUnion and Equifax.
- Provides additional services like security monitoring, credit check alerts, and personalized money management recommendations.
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Credit Karma's Revenue Model:
- Operates on a for-profit model by leveraging user data for targeted advertisem*nts and earning commissions from loan approvals.
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Credit Karma's Limitations:
- Users might not necessarily require its services if they have alternative means of accessing credit scores.
- Daily score fluctuations might not always align with FICO scores, which lenders might primarily consider.
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Credit Karma's Ownership and Acquisition:
- Initially founded by Kenneth Lin, Ryan Graciano, and Nichole Mustard.
- Acquired by Intuit in 2020 for a substantial amount, securing its position as a major player in credit score monitoring.
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The Bottom Line:
- Emphasizes Credit Karma's usefulness in providing a snapshot of credit status and detecting inaccuracies in credit reports.
- Encourages proactive credit monitoring but highlights alternatives such as bank-provided updates and annual free credit reports.
Credit Karma's value lies in its accessibility and transparency, enabling users to monitor their credit health conveniently while acknowledging its business model's reliance on user data for revenue generation.
