Credit Karma Wants to Become Your Trusted Credit Adviser

(Bloomberg Businessweek) -- Credit Karma is a website that allows users access to their credit score for free and provides recommendations for credit cards. That’s a business that depends a lot on its users’ trust.

Here’s how the website works: Log on and you get an easy-to-digest overview of what’s on offer. You provide some personal information, and in return you get access to your credit score and analysis of the main drivers of that score; you can also file disputes if something’s incorrect. Other freebies include alerts for any changes to your credit score, plus the usual financial calculators and educational tools. Credit Karma crunches your data to make product recommendations that match your credit profile, which means a higher likelihood of approval, and may also help you save by giving you a lower interest rate. That’s how the company makes money: If you get approved for one of its recommended products—from credit cards to personal and car loans, as well as car insurance—the provider pays Credit Karma a fee.

Until 2018, cards that paid the company higher fees could get preferential treatment in their placement on the site. As a result, users have become skeptical. “I don’t think the recommendations they make are necessarily good recommendations, I think it’s mostly just to generate revenue, but hey, that keeps it free, I guess,” 26-year-old customer George Rimakis says. Rimakis has been a customer for more than two years and logs on a couple of times a month, mainly to view his credit report.

Ken Lin, a co-founder, is well aware of that sentiment. But he says the company initially had no choice. It just wasn’t big enough to be able to avoid offering incentives to the lenders—marketing executives at large online loan providers wouldn’t even meet with its executives. In the early years, it also didn’t have a proven track record of attracting potential borrowers. “It took us the better part of 12 years to get here,” Lin says.

“Here” means more than 30 million users logging in every week to check their credit score and potentially sign up for financial products, according to Lin. Customers tend to skew younger, with more years of financial needs ahead. That’s put the power back into Credit Karma’s hands, which now charges the same flat fee for every card on its site, based on credit score and product category (rewards or travel, say), and plans to introduce the same structure for all its products. The only way to get higher placement is to offer consumers a better deal. “Trust is going to be the hallmark of success for Credit Karma,” Lin says.

The ramifications of its new approach are still unfolding. While the company’s revenue is on track to hit $1 billion this year, according to a person who’s seen its financials, that’s been driven by a rise in users to 100 million from 75 million in late 2017, before the change was introduced. Given that Credit Karma isn’t the only game in town, it will have to make sure providers remain onside, says Sarah Prohm, financial-services managing director at credit card marketing tracker Competiscan. “I think Credit Karma’s concern would be that card issuers aren’t seeing enough returns,” Prohm says. If a competitor emerges with a more attractive offer for providers, it’d be easy for Visa or American Express to flip the switch.

To contact the editor responsible for this story: Madeleine Lim at mlim131@bloomberg.net, Pat Regnier

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