Is Credit Karma Accurate?

Credit Karma promises to provide you with your credit score and credit report for free. But is it giving you the same information that a lender will access if you’re applying for a mortgage or a car loan? And for that matter, is it giving you anything that you can’t get elsewhere?

To answer those questions, it helps to know what Credit Karma is, what it does, and how its VantageScore differs from the more familiar FICO score.

Key Takeaways

• Credit Karma offers you a free credit score and credit report in exchange for information about you. It then charges advertisers to serve you with targeted ads.
• Credit Karma’s credit scores are VantageScores, a competitor to the more widely used FICO scores.
• Those scores are based on the information in your credit reports from Equifax and TransUnion, two of the three major credit bureaus.
• Your Credit Karma score should be relatively close to your FICO score.
• The category your credit score falls into (such as “good” or “very good”) is more important than the precise number, which will vary by source and can change from day to day.

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 whose “long-term vision is to automate the tedium out of finances so consumers can spend less time in the details and more time living their best lives.”

To use Credit Karma, you have to give the company some 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, computes a VantageScore, and makes it available to you.

Note

The score range for Credit Karma’s credit scores is 300 to 850. They are broken into three categories, 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?

Credit Karma uses the VantageScore credit-scoring model, which was created by the three major credit bureaus—Equifax, Experian, and TransUnion—as an alternative to the longer-established FICO model. Although VantageScore is less known to the public, it claims to be able to score 33 million more people than any other model. One reason is that it scores people with little credit history, otherwise known as having a “thin” credit file. If you’re young or recently arrived in the United States, that could be important if you’re trying to obtain credit.

Credit Karma doesn’t collect information on you from your creditors but instead relies on information supplied to it by the credit bureaus. So its scores should be as accurate as any others based on that information.

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, then chief consumer advocate at the company, 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.”

VantageScore or FICO Score: Does It Matter?

VantageScore and FICO are both mathematical models used calculate credit ratings based on consumers’ use of credit. FICO is the older and better-known model, having been introduced in 1989. VantageScore made its debut in 2006.

In addition, VantageScore and FICO each offer multiple scoring models, some tailored to specific industries such as mortgage or auto loan lenders. So not only might your VantageScore and FICO score differ slightly, but you may have several different VantageScores or FICO scores depending on the particular model used to compute them.

However, your scores should be in the same basic range on any or all of those models. You should not have a “very good” VantageScore and only a “fair” FICO score.

Key Differences Between FICO and VantageScores

The differences between the FICO scores and VantageScores are relatively minor:

• FICO remains the most widely using scoring model, so a lender may be more likely to consult it than your VantageScore.
• VantageScores, as mentioned, are designed to rate a greater number of new or infrequent credit users, which can be an advantage to would-be borrowers who have not yet established much of a credit history as well to as lenders that are attempting to assess their creditworthiness.

Similarities Between FICO and VantageScores

Both FICO and VantageScores have the same purpose: to help lenders judge how much of a risk you might pose. Important similarities include:

• They are based on information from the same credit bureaus (with the exception of Experian, which is used only for FICO scores).
• Both consider the same basic factors in determining your score, although they weight them somewhat differently. For example, FICO and VantageScore both assign the greatest importance to your payment history, although their most widely used models weight it at 35% and 40% respectively.

As a result, your credit scores should be in the same general range, if not identical.

Important

Your credit score is only as accurate as the information that’s used to compute it. So it’s worth checking your credit reports periodically for any errors that may be dragging your score down. You can obtain copies for free at AnnualCreditReport.com.

Other Services Offered by Credit Karma

In addition to providing credit scores and reports, Credit Karma has other related services, including a security monitoring service and alerts for when your credit reports have changed in a significant way. 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, car loan, or 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—and too many of them can take points off your credit score. 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!”)

Nearly 130 Million

The number of users that Credit Karma claims in the U.S., U.K., and Canada.

How Credit Karma Makes Money

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.

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.

Note

Using Credit Karma to obtain your credit report won’t hurt your credit score. That is considered a “soft” credit inquiry, not a “hard” inquiry. 

Credit Karma Drawbacks and Limitations

The first question is whether you need Credit Karma’s services, free or not. While Credit Karma may make it more convenient, you can also obtain similar information on your own and without subjecting yourself to advertising. For example:

• You have a legal right to a copy of your credit report from each of the three major credit bureaus at least once every 12 months.
• While your credit score is not part of your credit report, you can obtain a version of it (often a VantageScore) free of charge from many banks and credit card companies as well as from some websites.

In addition, using Credit Karma may encourage unnecessary borrowing by some consumers, since it has a financial incentive to sign you up for new loans. It’s best to use Credit Karma to check 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.

Does Credit Karma Use FICO?

No. However, the credit score Credit Karma provides will be similar to your FICO score. The scores and credit report information on Credit Karma come from TransUnion and Equifax, two of the three major credit bureaus. Your scores can be refreshed as often as daily for TransUnion and weekly (in some cases daily) for Equifax.

Is It Safe to Use Credit Karma?

Probably 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 FICO Scores Different?

The credit scores that Credit Karma provides are VantageScores. VantageScore and FICO are the two big rivals in the credit rating business. Their models differ slightly in the weight they place on various factors in your spending and borrowing history, but their results should be relatively similar.

Who Owns Credit Karma?

Credit Karma is currently owned by Intuit, the software company behind TurboTax and QuickBooks, which purchased it in 2020.

The Bottom Line

Millions of people use Credit Karma to track their credit scores. But 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 provide your credit scores, and you have a legal right to free copies of your credit reports at least once a year. That said, Credit Karma can be convenient for one-stop shopping if you’re in the market for a loan or other product and want to know which ones you are most likely to qualify for.

Read the original article on Investopedia.