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If you’ve ever looked for a free credit score online, you may have been unpleasantly surprised to discover that “free” often means just for a limited period, after which you get charged monthly.
For instance, the seemingly straightforward FreeCreditScore.com only offers a free score for seven days, after which you pay $12.99 per month. And just a few weeks ago, the Federal Trade Commission stopped a scheme in which at least 50 websites lured consumers to free credit scores, only to slap them with a $29.95 monthly fee for credit monitoring services for which they had never signed up — and then stall their requests to cancel.
Given how important a credit score is to anyone about to reach a major financial milestone, it’s imperative to find honest numbers to get a realistic sense of which credit lines they would likely be approved for, or to clean up any errors in advance of applying or to find better rates.
For seven years, Credit Karma has been offering a free credit score from TransUnion, one of the three major credit bureaus. (Free scores are also available at Credit.com, which offers one from Experian, and Mint.com, which provides one from Equifax.) Today, Credit Karma will begin rolling out a second credit score from Equifax, allowing its 33 million users to compare two scores side by side. The scores will be updated weekly.
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“This is the future,” said Ken Lin, founder and CEO of Credit Karma. “It’s not about paying for your credit score. It’s not about blindly taking offers that you’re not sure are right for you. It’s about having a technology platform that really assesses, what are you spending money on, what are the best options for you and what is the simplest way to apply for them?”
Since it’s not charging $30-$40 for a credit score, Credit Karma earns its money by offering consumers better rates based on what it already knows about their debt.
“With Credit Karma, we’re able to see the actual debt of consumers and understand to whom they owe that debt and what the interest rates are. Then we can say, Laura is paying 15% on her auto loan, and Capital One Auto Finance would gladly have her as a customer and give her a loan at 9%,” Lin said. For consumers who make the suggested switch, Credit Karma would earn, say, $150, Capital One would nab a new consumer, and, said Lin, “arguably, the only loser in that model is the person who is overcharging you.”
Describing the $11 trillion consumer debt landscape as “opaque,” Lin said that most consumers don’t know what other people are paying for, say, their auto loans or mortgage, so they have no way of judging whether they have a good or bad rate or when they might improve upon their rate.
“The bank doesn’t reach out to me and say, ‘Oh my gosh, your credit score has improved. Let me lower your loan rate.’ But the opposite is certainly true: Your credit score has gotten worse, they charge you more,” said Lin.
Credit Karma break downs the factors that comprise one's score, such as credit utilization, on-time payments and derogatory marks, so consumers can understand what behaviors affect their score. The site also compares users to consumers with similar backgrounds to show how they approach credit, how much debt they have, etc.
The ability to see two scores side by side could help consumers uncover serious inaccuracies. A February 2013 FTC study found that 25% of consumers have errors on their credit report that could affect their score. More than one in ten saw a change in their credit score after getting a credit reporting agency to fix errors on their report, and 5% saw their score change by more than 25 points.
The new score could also help the 10 million to 12 million victims of identity theft identify the problem early on, if they see discrepancies or abrupt changes in their scores and realize their credit report shows inquiries they didn't make.
In 2013, Congress did introduce the Fair Access to Credit Scores Act, which would require the government to offer free credit scores along with the free credit reports it offers at AnnualCreditReport.com, but the bill is far from becoming law.
Credit Karma’s user base is expanding quickly, at a rate of more than one million a month. The average user taps the services four times a year and sees his or her score rise 20 points a year.
