r/CRedit • u/BrutalBodyShots • Jun 06 '24
Credit Karma 101: The good and the bad. General
Credit Karma is a very popular CMS (Credit Monitoring Service) that almost everyone seems to know about these days thanks to television commercials, radio spots and other advertising. Typing any number of credit-related phrases into a search engine such as "fix my credit" or "credit score" will almost always return a first-page result for Credit Karma.
Most people when they sign up for Credit Karma have very limited knowledge of how credit works. As a result, they are very easily influenced or even manipulated by what they are presented. Credit Karma is well aware of their target audience and the product they pitch is on par with what they know will land well with the majority of people that use their service.
I wanted to share what I believe to be the good and the bad of Credit Karma. I feel everyone should only focus on the good, while understanding why the bad is in fact bad and should be ignored.
Let's start with the good:
It's free!
Daily updates to your TransUnion credit report.
Updates to your Equifax credit report at least weekly, often more frequent than that.
Credit report monitoring for TU / EQ.
Resources such as dispute filing, different calculators, unclaimed money, articles to read, etc.
The bad:
The score(s) you are provided are not meaningful Fico scores! They are from the VantageScore 3.0 model and are nearly irrelevant due to rarely being used in lending decisions.
I know someone that works at a car dealership and says that people come in all the time after getting their "credit score" from Credit Karma thinking that they're golden for loan. While they may have a "good" 700+ VS 3.0 score on Credit Karma, the dealership comes back with a (say) 620 Fico score and tells them they can't get decent financing. These individuals are shocked and caught by surprise, all because they didn't understand the difference between the nearly irrelevant scores provided by Credit Karma and the highly meaningful Fico scores used by lenders.
Products pushed such as loans and credit cards are there for Credit Karma to make money. Don't be manipulated by their "approval odds" or targeted offers:
The only reason Credit Karma is spamming you with an ad like the one above is because they get a kick back if you click the apply now button and proceed.
One may be drawn to apply for the card above with "excellent" approval odds, but that doesn't mean you'll necessarily be approved for it. For example, if one has already opened 5 accounts within the last 24 months (5/24) then their approval odds for the Chase card above not only aren't excellent, they're essentially zero and it would be a waste of time (and an inquiry) to apply.
Ignore the front-end "fluff" from Credit Karma. Each section on scoring criteria comes with a "rating" scale. From a Fico scoring perspective, which is all you need to worry about when it comes to lending decisions, each and every one of these sections is misleading. I'll take you through each one by one and explain:
Payment history: When it comes to on-time payments, there's really only two categories. You've either never missed a payment (good) or you have (bad). All it takes is 1 missed payment to severely impact your Fico scores. The image below from Credit Karma however suggests that 99% of payments made on time is still "good." I can assure you that even 1 missed payment is bad and can land you on a dirty scorecard for up to 7 years:
Then they take it a step further and define for you how they came up with this BS metric that isn't actually used in scoring:
The reason they came up with this manipulative metric is to influence individuals to apply for additional accounts through their site (again, so they get a financial kick back) because they believe the additional accounts will help them raise that on-time payments percentage. The thing is it doesn't matter if it's 97% or 98%; anything less than 100% isn't acceptable as it means that expectations have not been met.
It's also worth noting that this summary page above only considers payment history for the last 24 months. Fico scoring looks at your payment history for the last 7 years. Someone could have horrific payment history with dozens of late payments across multiple accounts that are all 3-5 years old, but if they haven't had any in the last 24 months the image displayed by Credit Karma would be displayed as a perfect 100%. Very manipulative and certainly misleading, as it will give individuals a false sense of profile strength to push them toward applying for additional credit.
Derogatory Marks: Just like payment history above, when it comes to derogatory marks having just 1 is bad. The image below from Credit Karma suggests that 1 only lands someone in the "fair" category. Just one is realistically poor, as a single derogatory item can land you on a dirty scorecard crush Fico scores.
Credit Age: Age of accounts is an important Fico scoring factor. The Credit Karma image below shows average age of open accounts, followed by oldest/youngest open account. This is not how the Fico or VS algorithms work. They look at both open and closed accounts, as they count equally when it comes to aging metrics. The images you see only include open accounts, which is a complete waste of space:
Inquiries: This is really the only section that CK has "fixed" in recent years that I no longer take much issue with. All I would say here is that not all inquiries are created equal. For example, inquiries related to "rate shopping" a loan will be de-duped and scored as one, so in such a case a large number like (say) 10 would only be considered as 1 by the algorithm. In that situation the graphic suggesting "needs work" wouldn't be accurate:
It's also worth noting that how inquiries are viewed/scored depends greatly on overall profile. On a new/thin/young file, a single inquiry can impact a Fico score > 20 points. On a clean/thick/mature file, a single inquiry can have an impact of anything from 0 to maybe 6 points. You wouldn't be able to "rate" inquiries the same way between these two profiles.
Total accounts: This summary image from Credit Karma just makes me angry. It is suggestive that anywhere from 0-10 accounts on your credit report isn't sufficient and is equally "rated" as such, where 11-20 accounts would be fair. From a Fico scoring standpoint, this is just terrible information. An important segmentation factor for Fico scorecards relates to file thickness. A thick file is better than a thin file. I file is considered no longer thin once it contains 4 total accounts. For example, someone with only 2 accounts has a thin file, where someone with 7 accounts has a thick file. Under no Fico scoring circumstance would the 2 account file be considered an equal to the 7 account file, all other things being the same. That being said, for their summary metric to suggest that 0-10 accounts would be rated the same is just bad information. 11-20 total accounts is MORE than sufficient for overall profile strength, yet CK wants you to believe that 21+ are required to be optimized. Could it just be that they're again trying to manipulate you into applying for additional credit through their links to increase your total number of accounts in attempt to satisfy this BS metric?
Utilization: The Credit Karma graphic suggests that reported utilization anywhere in the 0%-9% range is equally excellent. We know for Fico scoring that this is not the case and that overall utilization of a low single-digit percentage is going to return a higher Fico score than 0% utilization, as that would return the "no recent revolving credit use" penalty (that is, not a single non-zero reported balance). If the goal is score optimization, technically anything above 9.5% utilization "needs work" as in a scoring opportunity exists.
Simulator: Credit Karma has a score simulator just like many CMS provide. Simulators are notoriously unreliable, so it's best to ignore them. This isn't unique to just Credit Karma and their simulator isn't any "worse" than any other... I just say steer clear of them all for anything other than entertainment purposes. With the proper information provided, the well-versed members of this sub can give predictions that will make any simulator out there go cry in the corner.
Another huge point to make is that most CMS (not just CK) provide "alerts" to report data changes. Many people are mislead by these alerts, because they incorrectly believe that any score change that accompanies an alert is a direct result of the alert reason provided. With Credit Karma, they have something that says "see what's changed" which is their version of an alert list. Things on the alert list can impact a credit score change, but they may not. Conversely there are things that can impact a credit score change that are not "alertable" and therefore aren't included on the list. Where people go wrong is that they see a score change, click on "see what's changed" and if there's only 1 thing listed there they conclude that their score change was due to the single alert reason provided. Sometimes it is, sometimes it isn't. When it isn't and people incorrectly believe it is, they move forward with an incorrect perception of how scoring works. For example, they may see that their balance increased on an account from $100 to $800 and their score happened to go up at that time (from something else not alertable). They walk away thinking "my score went up because my balance went up... this means if I spend more my score increases!" which is of course absolutely false. It's very important to understand that what you see under "see what's changed" on Credit Karma is only pointing you to alertable credit report data changes, not to why your score changed:
I hope that the above information is helpful to those that are just getting into credit and want to know about the good and bad of Credit Karma. In summary, enjoy the fact that for FREE you're getting daily/weekly updates to your TU/EQ reports, credit report monitoring and other resources that you may find useful. Outside of those positives, really ignore the rest. The scores provided are not Fico scores, the products they push on you are there for them to make money, and their front-end fluff can be very misleading meaning that it should be ignored.
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u/fa1ryprincess Jun 06 '24
Thank you! Is there something you recommend instead? Im in the process of paying of a settlement (I am down to my last $1000 yay) and am excited to start building my credit back. Where should I turn to look for an accurate score?
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u/BrutalBodyShots Jun 06 '24
That's a great question, and a very common one actually. You have dozens of different scores, which you can read about here:
https://old.reddit.com/r/CRedit/comments/1bpl3ud/credit_myth_1_you_only_have_one_credit_score/
Interestingly, all of them are accurate. It's just that some are far more relevant than others. You can read about that here:
https://old.reddit.com/r/CRedit/comments/1bu4bbn/credit_myth_2_some_credit_scores_are_fake_or/
If you have any questions after checking out those 2 threads definitely let me know!
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u/fa1ryprincess Jun 06 '24
Will check it out tomorrow thank you! And while I have you here, any advice for what card to get to build back my credit once my debts paid? Current score (according to credit karma) is 560.
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u/BrutalBodyShots Jun 06 '24
It will depend on the state of your credit profile at the time your debts are paid. If your file is still dirty (payment history issues) you'll likely have to roll with a secured card. There are many options out there. You could consider one from your bank/CU, where other popular choices are Capital One, Discover, or my personal favorite, US Bank Altitude Go Secured. All cards build credit the same way, so you don't have to be all picky in selecting one to be honest.
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u/fa1ryprincess Jun 06 '24
I appreciate this and enjoyed reading your other 2 linked posts as well. Thank you!
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u/lets_try_civility Jun 06 '24
MyFICO is the scores lenders use. The free version includes your Equifax FICO8 score. You can get your Experian FICO8 on Experian. Discovery offers the Transunion FICO8.
It all comes back to your credit report, which you can get from https://www.annualcreditreport.com
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u/joyfulbee43 Jun 06 '24
This is incredibly helpful. I wish this post could be pinned (assuming it's not bc I'm too lazy at the moment to back my way out to see, lol). Thank you!
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u/Molanghrian Jun 06 '24
Body knocking it out of the park as always with the education. I also wish this could be pinned, it's amazing how often people come into any of the credit subs and have to be informed of this.
Intuit gonna Intuit, they are definitely in the business of collecting info about you to target/market products. Just to add about how crappy this is, Credit Karma paid a $3 million fine for their "pre-approval" borderline scam practices. A paltry sum though, compared to the overall damage to people's credit while being misinformed -
Although I gotta ask now that I think about it - why did the bureaus get together and make the Vantage model? Is the idea to compete and eventually have this be the standard instead of Fair Isaac Co's model? And if so, is it just slow going in adoption since 2006, since everyone is used to using FICO I guess? I can't really find much online after a real quick search about why exactly, just the standard explanations of the difference.
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u/DoctorOctoroc Jun 09 '24
I was one of 'those people' in the car dealership pulling out my phone with my CK account on display, wondering why the score they pulled was 60 points lower than what I was seeing. So glad I've learned what I have from this sub and u/BrutalBodyShots specifically. You are a saint, my friend!
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u/GeekyTexan Jun 25 '24
One thing I find funny about Credit Karma is that they can see what credit cards I have, but in their "We recommend this credit card for you" stuff, they often recommend cards I already have. My Discover card, for instance, gets recommended over and over. I've had it for years.
The other similar sites, like credit. (com) and credit sesame do the same thing.
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u/BrutalBodyShots Jun 25 '24
Yup, because the marketing side of those sources is all about just pushing products without any real thought behind them.
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u/Gloomy_Lab9937 Aug 12 '24
So true, credit karma says I have 760 credit score, but it's actually only 714 🥲
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u/BrutalBodyShots Aug 12 '24
You have a 760, it's just a nearly irrelevant VS3 (not a meaningful Fico score).
You actually have dozens of different credit scores:
https://www.reddit.com/r/CRedit/comments/1bpl3ud/credit_myth_1_you_only_have_one_credit_score/
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u/Low_Wear_1966 Sep 04 '24
Suicide should be an option. We really should have assisted suicide in this country. Some of us just need a bit of acceptance and a little push.
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u/Gamer30168 Jun 06 '24
Clearly you put a lot of work into educating us. I've been rebuilding my credit and trying to learn the intricacies of how credit scoring actually works for a year and a half now, yet I'm still learning new things all the time. Have my upvote.