Credit Karma has made waves in the financial industry by offering both free credit scores and free credit monitoring to its customers. At first, a lot of people were worried that Credit Karma is a scam. But, after an in-depth Credit Karma review, it seems that the company is legit. However, it is important to understand just what it is that they offer.
Credit Karma vs FICO
First, a credit score is nothing more than a number calculated from information in a person’s credit report. The idea behind a credit score is to determine algorithmically how good of a credit risk someone is without actually have to read through the details of a lengthy credit report. The resulting number is only as good as the math that created it. The more statistically accurate the number is, the better the score is.
However, in the real world, there is really only one credit score that matters. Fair Issac was the first company to popularize the concept of a credit score. Over the years, it has demonstrated that its credit score algorithm is accurate enough statistically for financial investors to use it in determining risk. Since then, there have been other companies using other statistically models to generate their own credit scores. Most notably, the three major credit bureaus have all tried to push a credit score of their own, but without much success. When it comes to actual lending, the gold standard is the FICO score.
That leads to another type of mathematical attempt at creating a credit score. Since the only credit score anyone really cares about is their FICO score, that is the score that people want to know. Since that score is a proprietary product of the Fair Issac company, they are the only company than can calculate your actual FICO score.
However, the company was forced by Congress to provide a little bit of transparency into the process of calculating a score by providing some general information as to what a FICO is based on, and just as importantly, what it is not based on. Starting from there, numerous entities have tried to develop an algorithm for creating credit scores that generates a similar score to the official FICO score. Doing so requires reverse engineering the mathematics that go into the score. No one has exactly duplicated the score, but many alternate scores provide a close approximation.
Credit Karma does not provide a true FICO score. Doing so would be prohibitively expensive for a free offering, even with the revenue generated by advertising and referral fees.
How Accurate is Credit Karma Score
The Credit Karma score accuracy question comes down to how typical you are as a user of credit. If your credit profile is one with typical amount of debt, income, ratios, and payment history, your CreditKarma.com score will be pretty accurate. This type of credit profile has been reverse engineered more than any other and therefore the alternate algorithms are better at predicting this kind of score. If, on the other hand, your credit profile is unusual, your score may be significantly off.
For example, if you have a very short credit history, but very high income your score might not be very accurate. Likewise, people with a long, but atypical credit history might find their score way off.
Either way, the best use of any free online credit score is to track the MOVEMENT of your score over time. If your score is going up, then the chances are very good that your actual FICO score is doing the same. The reverse is also true. If you do something like open a new credit card, or cancel an old one, and your Credit Karma credit score goes down, you might want to consider reversing course.
Regardless, knowing your “real credit score” when you are not applying for credit is not very useful. Your score changes every day, so even if you get your official, 100% accurate, FICO score on Monday, but Friday, your score may be up or down several points, just like your CreditKarma.com credit score might be off by several points. In other words, don’t stress out about the exact number. Instead, focus on making the number go higher, or at least stay the same.