What’s Your Grade? Credit Karma’s Credit Report Card

Credit Karma has launched a new, web-based tool that turns your credit score into an easy to read report card that grades your credit health. Best of all? It’s free.  Credit Karma CEO, Ken Lin, was excited to talk about the new reporting tool that provides insight for consumers who don’t understand their credit score, but actively want to improve it. Read more

Credit Karma’s Ken Lin on FICO’s New Scoring Model

In the age of the credit crunch, credit scores are the passport to your financial future.  The new year has brought many things, and with it, a new scoring model.  We spoke to Ken Lin, CEO of Credit Karma (a website that lets you check your credit score for free — anytime, anywhere) about the change in the FICO credit scoring model to get a better idea of what the changes are and how they will affect you.

Can you give us an overview of the new scoring formula?
It hasn’t been fully disclosed or anything.  They’ve selectively agreed to point out certain things.  But the way it looks like things are going to work, it’s going to be a more holistic view on a person’s credit.  So what that means, is that it takes fewer of the micro late payments and looks at your credit on a more holistic level –  late payments or single late payments don’t matter as much on your credit score, but long term late payments will have a bigger impact.  I think that’s one of the first changes.

I think a secondary change is really around the authorized users and the notion of piggybacking your credit.  I think that’s been one of those things where people have gamed the system — where if you add an authorized user in your credit report, you are in fact transferring some of your good credit over to that person — and basically stop that process or that loophole, if you will.  And really the third component or maybe the global picture, they’re really trying to help lenders better determine who are lower risk people.  I think that’s the ultimate objective.  But at the high level, it’s all about making more of a holistic view on the credit score, rather than the minutia, as well as fixing a few of the loopholes in the hopes of getting a better [read] for lenders.

So, when does this new scoring method go into effect?
Well, it’s interesting.  So what happens most of the times with these scores, lenders will actually test it.  So it launched I think actually today or yesterday, with TransUnion.  I think Equifax is coming down the road, and Experian hasn’t actually released the date.  But normally  what happens with new credit scores is that financial institutions have billions of dollars in their portfolio based on existing credit scores, so they’re generally hesitant to switch over completely or unilaterally to new credit scoring systems without testing it.  What I suspect, is that banks will slowly migrate as they test it.  And what they’ll ultimately do is test this score against the old score and see if there are actually pickups in the performance of being able to detect chargeoffs or risk.  I think once those numbers come in, they’ll be more likely to make a final switch.

What spurred this change, or does FICO regularly and routinely change their methodology?
You know, credit scores haven’t stayed the same, really ever.  I think historically there have always been updates.  There have always been tweaks to get them to normalize for different years or economic conditions.  But even if you look at the current FICO score, its been updated five or six times since its original release in the late 90’s.  So this is a constant, but I think this one is a little bit more radical from the standpoint that they’re trying to address more of the macro level issues instead of the loopholes that we spoke about.  But you have to keep in mind that credit scores are constantly evolving, and its never the case where you have one consistent score from the beginning of time for you.

OK.  I was wondering if it had anything to do with banks lending money to unattractive borrowers and the whole sub prime debacle that we just went through?
You know, I think that probably is a little bit of the underlying effect.  I mean, credit scores, they’ve performed well.  I think the whole sub prime debacle is more of the factor that the banks got a little more greedy.  They were continually lowering their criteria or their threshold in the hopes of making more profits, and it just ultimately backfired.  I think part of this is grounded in the fact that you always want to be able to better mitigate your loss or predict losses based on your credit score.  I don’t think credit scores ultimately brought down the industry.  It was more of a case that the industry was a little too greedy and willing to lower their standards.

Do you think this new method will prove to be more beneficial to people, or do you think that a lot of people will see their scores being lowered?
Its too early to tell, but this score is meant to benefit banks and lenders — quite honestly, right?  Credit scores are always built for lenders.  Consumers are finally becoming aware of it because they know how much impact it has on their financial well being.  But historically these things are built for lenders.  And the ultimate gauge of whether this score is successful, is if it will be able to differentiate good borrowers from bad borrowers.  And that will be the decision.  So from a consumer’s standpoint, it’s important for them to always be aware of what their credit scores are, and making sure their credit reports are accurate.  But I think this particular change will have little impact on the consumer — more of the impact is really going to be focused on the lender and their profitability.

Like you said earlier, it’s going to be focused more on the minutia.  I heard that the smaller problems, like if you have a doctor’s bill for $100 that accidentally went into collections, it would mean less.  Is that true?
Correct.  Right.  It de-emphasizes the smaller aspects and looks more at the macro level trends.  So if you have a long history of always being late or being delinquent on your bills, that’s taken into more of significance, rather than if you have a small doctor’s bill, a collections notice, for a $100 or less — it has less of an impact.  And along the same lines, if you recently missed a payment, but you’ve always paid your bills on time, that will also have a much lower impact on your credit score.

I was also reading that they’re going to be focusing more on the credit to debt ratio.  Does it hurt your score to have a credit card open, but to never use it, if it’s paid off?
So, they’re starting to look a little bit more closely on inactive accounts.  I think the general rule of thumb is if you have a line of credit that’s available to you that you don’t use often, use it every couple of months to show that there is activity so that it continues to contribute to your active credit line.  I think the new model suggests that they are going to be de-emphasizing credit limits if you don’t use them.  So a simple way around that is to buy a tank of gas every other month with your card so that you continue to show usage.  That will kind of mitigate any of the negative impact of having credit lines that sit dormant.

Will the new scoring model change the way they differentiate between labeling scores good, fair, poor and excellent.
I don’t think so.  Historically, credit scores have been normalized.  Meaning that at any given year, they expect the same score to have the same amount of chargeoff.  So I think because everyone is so used to that standard, they’re not going to be changing the definition of good, bad, and poor.

What about precautions?  Are there any new ones that we should follow or should we stick with the same rules that we’ve been doing, like keeping a healthy credit to debt ratio and keeping accounts that are paid off open?
Yeah.  There are so many components that go into a credit score — I think at the last count it was over 200.  And for a consumer to actively monitor 200 or try to you know, eek that last 2 or 3 points of improvement really becomes difficult.  So following the general rule of thumb of not carrying too much debt, making sure your credit reports are accurate, not having too high of a utilization — those general types of tips will be always true.  I think consumers should be more worried about those macro trends, instead of doing X,Y, and Z to get the last three points of improvement.

And is there any advice to someone who’s planning to purchase a house or car this spring, and will need to have a good score?
Yeah.  Well, I think credit scores are more important than they’ve ever been in the last ten years, if you will.  If you’re looking to make a major purchase, I think consumers need to start being aware of their credit scores today.  And anything lower than a 720 for example, on a mortgage is going to be really difficult to get good financing or at least financing at the best rate.  So consumers need to be diligent about monitoring their credit scores probably 6 months to a year ahead of that purchase.  Ideally they’re constantly monitoring their credit score.  They need to be very cognizant of cleaning up their [credit] lines, making sure they’re paying down their debt, and getting to the threshold of 720 plus, so they can get the best rates.

Will consumers be able to get a free copy of their credit score once the majority of the banks transition over to the new scoring model?
Well, this is a really interesting point.  I mean, historically you can only get your FICO score from myFICO.  Experian recently cut off their relationship with them.  So you can only get two of your FICO scores through myFICO.  But even FICO released the fact that they’re actually not planning to release this new FICO score to consumers for another two to three years, so these recent changes kind of, again, support the fact that from a consumer’s perspective, they can’t get too caught up in what they need because they still won’t technically have access to it for a few more years.

Is there anything else you’d like to throw out to our readers?
You know, I think the continuing message that we continue to support is that credit scores are very important for almost every aspect of financial health.  This is a minor change that consumers should be aware of, but they should definitely be aware of those macro level changes in terms of the economy and having good credit.  That’s just one thing that we continue to tell consumers — be diligent about knowing your credit score and really how they work.

One on One With Credit Karma’s Kenneth Lin

I was introduced to Credit Karma a few weeks ago at a Quicken media event courtesy of a chance meting with a company representative who gave me the scoop on the site. The prospect of obtaining free credit scores was more than a little bit awesome, so I thought it wise to probe deeper to get an understanding of just how Credit Karma pulled it off. This led to an opportunity to chat it up with Credit Karma’s CEO and Founder, Kenneth Lin to find out a little more about the company, its goals, and how it’s able to produce no-strings-attached free credit scores any day of the week. Keep on reading for some behind the scenes info (and a few credit building tips!) on one of the most helpful and beneficial websites to hit the interwebs.

1. When did Credit Karma officially launch?
Credit Karma launched its beta service in February 2008.

2. Aside from your service being free, what are the benefits of using Credit Karma instead of just getting a free credit report each year?

We have three core value positions for consumers.

First, we provide consumers free access to their credit score anytime and as often as necessary without any hidden fees or obligations. Second, we provide educational tools and content to help consumers better understand how credit and credit scores work. Third, we provide access to offers and incentives based on credit score ranges. Today many of the offers come from financial services companies. We are currently expanding into other industries including cable, wireless and insurance, just to name a few.

3. Do you have a background in the credit scoring industry? And is Credit Karma your first entrepreneurial venture?
I do. I started my career working for a Credit Card company building scoring models and evaluating default risk about 10 years ago. Since then I have managed online marketing programs for pro-consumer companies like E-LOAN and Upromise.

Credit Karma is actually my second entrepreneurial venture. I founded an online marketing company in 2006 which helped shape the business model for Credit Karma.

4. What inspired you to start Credit Karma?
Having worked with great consumer brands like E-LOAN and Upromise and financial pioneers like Chris Larsen, I saw an opportunity to build a service that could help consumers better understand and access credit.

Prior to Credit Karma, there were only a handful of ways to access your credit score and most of them had hidden fees or obligations. Considering that a credit score is probably the most important metric of a consumer’s financial health, I think free access should be a fundamental consumer right. So I set out on finding a way to provide this service for free.

5. What is your mission for the Company, and are you more focused on just making credit scores available or is there a focus on helping people improve their credit scores and offering them ways to increase it?
We are focused on demystifying credit and making credit scores available to all consumers for free. In today’s economic environment, credit is more important than ever. Our service is built to educate consumers on the importance of good credit, maintain and manage credit health and then reward good credit through offers.

6. A lot of the sponsors on the site are for credit cards. Do you think it’s a conflict of interest since a majority of Americans are already in good deal of credit card debt? Credit cards present a great convenience when used properly. In many cases, they are also the backbone of a consumer’s credit report and history. We stress education and proper management of debt. For example, our site provides consumer unbiased user feedback on credit cards along with editorial recommendations based on usage type, credit score and member experience.

Everything on the site is geared to help consumers become more informed about finances whether it is loans, credit cards, savings rates, or even cable services.

7. Where do you pull your credit scores from? Is there a specific reason why you chose that credit bureau?
We are currently using TransUnion as our credit bureau. We chose them because they share our vision of helping consumers.

8. I think a lot of people are worried that pulling their credit score each day will lower it. Does using Credit Karma affect a person’s score in any way?
Checking your credit score on Credit Karma does not impact your score. This is a common misconception. The truth is that pulls initiated by the consumer for the consumer’s own use will not lower the score.

There is a strong need for education in the market on this and other issues related to credit especially right now. We hope Credit Karma can help educate consumers on managing their credit score over time and provide tips, tools and simulators to support better decision-making and improve individual credit health.

9. Do you plan on expanding the Company and in what ways?
Our expansion is centered on two key areas. Better tools and content and better offers and incentives. Better tools is all about making credit easy to understand and transparent. Our recent launch of the credit simulator is a prime example of this vision. The Credit Karma simulator predicts the affects of various everyday financial actions against your credit score. The simulator is custom for each individual’s credit report. For example, applying for a credit card may lower one consumer’s score by 25 points on one, and only 2 points for another.

The second component is finding more partners to provide incentives to our members. Getting rewarded for good credit is the concept of “karma”. This aspect of Credit Karma’s offering will continue to grow over time.

10. Do you think that you guys will ever expand to include credit reports along with the scores and would that even be possible to offer for free since it seems like that would be taking income away from the credit bureaus?
Today, by law consumers can already get their credit report for free on annualcreditreport.com. We didn’t see much value in spending resources building something consumers already get for free. The score was the missing component. It is probably the most confusing aspect of credit so we decided to tackle this first.

We have a number of features and offerings in the pipeline based on user feedback and requests. We do not pose a threat to the bureaus as we pay for all data on the consumer’s behalf.

11. I noticed that you have a credit simulator that’s a bit more in depth than most credit score simulators that I’ve used before. Is there a way to offer tips for improving your credit score that are based on each person’s credit history?
I think our credit simulator is quite unique. It is customized by every user’s unique credit report. This is just the first step in our vision. We will continue to explore tools that provide user recommendations, educate the consumer and provide guidance for better decision-making.

12. Our website caters to a young, 20-something crowd that doesn’t have a long credit history. What are some tips for our readers to build their credit score without having 10 years of credit history and struggling to pay their student loans and credit cards on time each month?
We really stress financial responsibility. There is no easy way to build good credit. That means it takes years to build good credit and a few missed payments to destroy it. The best practices are:

1. Know your credit. You can’t improve it if you don’t it or if you don’t know how it works.
2. Pay your bills on time. Using credit is good and helps build your credit history but you have to pay on time to get this benefit.
3. Set a budget. If you are struggling to pay bills, you need to prioritize and have the fortitude to stick by it.
4. Find the right products. Whether it is a credit card, s student loan, or an auto loan, different products can cost you thousands over the life of the loan in interest and fees. Generally the better the credit, the lower the interest so use the knowledge to improve your score and then improve your rates.
5. Continue to learn. Financial health is complex. Use the content on creditkarma.com and other pro-consumer sites to be aware of trends in credit and financial products. Education can save consumer hundreds of thousands of dollars in interest and fees over a consumer’s lifetime.

Copyright ©2008 by LifeStyler

Ditch the Bureaus: Check your Credit Score with Credit Karma

Obtaining credit scores has always been an enormous hassle. You go to Annual Credit Report and request it, then you get it and it shows you the report – but not the score. That’ll be an extra $8. Read more