You may have seen a lot of television ads recently for Credit Karma. The site is aiming to be the Mint.com of credit scores. And, that’s a great idea. They’ve gotten venture-backing and have used it to fill the airwaves. They also have a lot of deals landed already, for example, Sears Credit Card holders get their “free credit score” from Credit Karma.
What makes Credit Karma different from other “free credit score” providers is that it’s, in fact, really free. Other companies give you a free credit score in exchange for long-term monitoring services… which you have to remember to cancel within 14 or 30 days (typically).
But, there’s always a catch, isn’t there? Well, yes, with Credit Karma there is a catch too. They don’t provide you with a FICO credit score. They provide a TransUnion TransRisk credit score. You’ll note that there is very little, if any, documentation on the web for TransRisk from TransUnion directly.
TransUnion is one of the three credit reporting bureaus, in addition to Experian and Equifax. All three credit bureaus, taking advantage of changes in credit reporting laws, now have rolled out their own credit scoring systems. These all have the same basic idea, to score your credit history and other personal factors, in order to generate something that rates your risk to financial institutions.
The problem? Nobody uses these scores. Well, almost nobody.
Just about everyone, from your mortgage lender, to the bank that gave you your car loan, odds are, still uses FICO as their base credit score. They may consider things in addition to FICO, but FICO is what they use.
FICO was developed by Fair Issac corporation, in an era where credit reporting agencies were limited to securely reporting your data, and not sharing scores or other formulas with other institutions. And, FICO works… it works really well, in determining people’s credit risk.
Unfortunately, credit reporting bureaus are starting to flex their muscle. Experian for example, won’t allow Fair Issac to sell you a FICO score report anymore from their records. Equifax and TransUnion still do.
You actually still can get your FICO score from Experian. Federal law requires banks and other institutions to notify you of your FICO score if they use it in determining your approval for a loan or other financial product. So, simply apply for one and find out!
So now that you know that FICO is what banks and other institutions generally use exclusively, why would a “TransRisk” score be worth much, if anything? Exactly. That’s why Credit Karma offers it so freely. TransUnion knows it doesn’t help consumers, like knowing their FICO score would.
We don’t know what factors affect TransRisk as much as we do FICO, either. For example, FICO penalizes you for having active balances on multiple credit cards. Having a $1,000 balance on five credit cards is worse than having a $5,000 balance on one credit card. Same for TransRisk? We don’t know. So, trying to boost your TransRisk/CreditKarma.com score, may not help you get that new car.
Am I saying don’t use CreditKarma.com? No. Just be sure to pay more attention to your FICO scores, because they matter more. Know what FICO measures, and how you can tweak your financial life to have the best FICO scores possible.