Wednesday, January 21, 2015

Is CreditKarma a Scam? Is it Worthwhile?


Credit Karma offers for free, what others also offer for free.


CreditKarma is a website that allows you to view credit reports from Transunion, and now Equifax.   It also allows to display your credit scores.   Is this a good deal?  A scam?  What?

Well, it does not appear to be a scam, in that they are not asking for money, stealing from you, or deceiving you.

Is it worthwhile?  In my opinion, no.  The credit reporting industry has changed dramatically in the last year, in that the once-coveted "credit score" which was touted as "intellectual property" of the credit reporting agencies, is now being offered for free by many credit card companies, such as Capital One and Barclay (both of which now offer no foreign transaction fees, too).

Not long ago, financial gurus like Suze "The Sooze" Orman were selling you your credit score as part of a $49.95 "FICO Kit" - and a lot of people were buying.  A good business for the Sooze, for sure.

Worse yet, many credit agencies were selling something called "credit protector" for $29.95 a month or some such, which provided you with your credit score and credit alerts if your score changed or your credit history changed.

And if you went on the credit reporting sites, they would provide you with an annual credit report for free - as required by law - (www.annualcreditreport.com) but would then offer to sell you the "score" for $7.95 which was considered intellectual property.

So getting your credit score was a bit of a pain in the butt, and you'd have to pay to see it.  Sites like Credit Karma seemed like a good deal, as you could see your report and score - for free.

But lately, it seems that the credit reporting agencies have largely given up on trying to play peek-a-boo with your credit score.   Many credit card companies are offering free credit score monitoring as part of the benefits package of the card - even low interest rate cards like I have.

So what is the point of CreditKarma again?  Now that this stuff is free from your credit card, their business model doesn't make much sense anymore.   And this is another prime example where an Internet startup can go from Hot to Not overnight, as conditions change.

Their business model is apparently based on advertising.  You log in, you check your score, and advertisers can then target you with credit offers.  Maybe these are good offers, maybe not.   I am inclined to think that the best offers, in terms of lowest interest rates, are going to be the ones that you seek out, not the ones that find you, through websites.

Generally speaking, it is a bad idea to bite on financial deals offered to you in e-mails, SPAM, online advertising, junk mail, and through telemarketers.   It is not that all of these deals are bad bargains or ripoffs, but that since they are paying to market to you, their bargains cannot usually be the best priced.

For example, in terms of low-interest cards, a small bank in Arkansas usually leads the way.  Simmons First doesn't do a lot of advertising or promotion.   You won't get a junk mailer from them.   They offer a no-nonsense card at a low rate (about 7%) and that's it.   Not a lot of "benefits" or fru-fru, just a basic low-rate credit card.  But they only offer the card to people with perfect credit, so you won't see come-ons from them for 0% rollovers or whatever.

Why are low-rate cards the best deal?   Well, again, if you rely on "willpower" as your bulwark against financial catastrophe, you will likely fail, as willpower ain't what it is cracked up to be.   The credit card companies know this just as a loan shark knows his clients or the pusher knows his junkies.

They know you will think you are "smart" by getting a "rewards" card with a high interest rate, and that you will say to yourself, "Gee, I will get all these frequent flyer miles!  And I'll never pay interest, because I will pay off the balance every month!"  They know this.

And they know that you will fail at this resolution.   Most people do.   It is a resolution I hear all the time from young folks.   Older people don't say this as often.   They've already made such promises to themselves and then broken them.   70% of Americans carry a balance from month to month.  Most from year to year.

So, CreditKarma is a website.  They offer you your credit score for free.  Other places offer your credit score for free, too.   The offers on CreditKarma may or may not be very good.   I would look at them with a critical eye.

The main thing, of course, is to stop obsessing about your credit and credit score.   Yes, it is important, when you are young, to have good credit.  You will need a clean credit history to get that mortgage and today, even a job. 

But as you get older, you should think less and less in terms of "Gee, how much more can I borrow?" and more and more in terms of "Gee, how many more payments do I have to make before I am debt-free?"

Checking your annual credit report for misinformation, incorrect information, or fraudulent activity is important, but you can get that information for free on www.annualcreditreport.com.   And really, once a year is all you have to check.

If you pay your bills on time and are not overly stretched on credit, your score should be sufficient.   And bear in mind that credit score isn't everything these days.  If you are applying for a mortgage, they will want to see proof of income as well, and your income/debt ratio is a huge factor in whether you are granted a mortgage.

You may have a credit score of 770, but if you make only $40,000 a year, they are not likely to approve a mortgage for $300,000 - regardless of how good your credit is.  The monthly payments would exceed your take-home pay.

When you obsess about your credit score, you let the credit industry win.   Stop thinking of money as something you borrow - but as something you own.   When you do that, you won't care about your credit score at all - and ironically, you will be offered the best deals in town.


UPDATE:  The Credit Karma site works well, although you have to provide your social security number for them to find your credit score.  Since I already know my credit score and just printed out my credit report, I did not need this information, but what Credit Karma provided, of course was identical to what I got from annualcreditreport.com and from my credit card company.

The full credit report is listed as in "Beta" mode and it did work.

As expected, there is an "offers" page and they want to sell you credit card deals.  The offers all claim they will save me money, but at 7% APR already and a $0 balance there is not much to be saved right now.  The Discover offer was "0% intro APR on purchases for 6 months. Then the variable purchase APR applies, currently 10.99% - 22.99%" and personally, I think Discover is a waste - no one takes it.

A Barclay Card offer is similar - "0% introductory APR for 12 months for each Balance Transfer made within 45 days of account opening. After that, a variable APR currently 14.99% or 18.99%, depending on your creditworthiness."

Avg. Rewards Rate Sign Up Bonus Value Annual Fees Your Earnings
calculated

over 1 year
2.00% $400 $89 - waived first year $900


What the site HYPES in large letters is REWARDS - cash back stuff.  They claim you will make as much as $900 a year in rewards cash back.   But in order to get $900 based on 2% rewards, I would have to charge a whopping $45,000 on my credit card, every year.   I don't spend that much money, period.

And with the high interest rates, the rewards will be wiped out in short order, if I fail to pay off the balance for even one or two months.   Sorry, but these sorts of deals are faux financial acumen at it worst.   Savings is what you put in the bank, not what you charge on credit card.

Note that they make taking one of these offers as simple as falling off a log.  Be sure you don't click on "take offer" by accident.

Note also that maybe one reason my credit card companies are offering free credit scores is so that I won't go to CreditKarma and thus not shop around my credit cards.   It may explain why credit score, once considered an industry secret, is being handed out like candy these days.

UPDATE February 2015:  As one reader noted, there is more than one FICO score, which ranges between 300 and 850.  Higher scores indicate lower credit risk.  Each individual actually has more than 49 credit scores for the FICO scoring model because each of three national credit bureaus, Equifax, Experian and TransUnion, has its own database.  Generally, anything 770 and above will qualify for the best loan terms.  To get such a score, you basically don't need to borrow money.  Catch-22.

Credit Karma seems to show more of a real-time scoring scenario:


Amazing how your score goes up when you don't need to borrow money.


Capital One provides a credit score from Transunion, but it only updates every two months.
 
Overall, I would say that CreditKarma is not a rip-off, but then again, no real bargain.   They provide two credit scores and credit histories, but at the expense of being advertised to with some pretty horrific "bargains."
 
For example, high interest-rate "rewards" cards are offered, along with balance-transfer 0% interest for 18 months deals.   Of course, you pay a fee for those 0% balance transfers, and if you have a score of 770 and above, chances are, you don't have a huge credit card balance to begin with!
 
The old saw is true:  In order to borrow money, you have to first prove you don't need it.
 
CreditKarma also asks demographic questions in order to "tailor offers to your needs!"   One question was "do you carry a credit card balance from month-to-month" and I answered "Yes" as sometimes I have to charge thousands in Patent Fees. 

Credit Karma Profile

Thanks for your input! We're working hard to make sure we can find you the best offers based on your profile.



50%
of Credit Karma members chose the same answer as you!


Interesting statistic.   And yet, everyone I meet claims to "pay off their balance every month".  According to the Credit Card industry, 70% of us are lying.

Credit Karma has a "recommendation" tailored especially for me!   I click on the link and it is to the Discover 0% 18 months rollover deal.   Not so much a tailored offer is it?  If they have access to my credit report, they should know the balances I have on my credit cards are ZERO and ZERO.   Nevertheless, they claim a "savings" of $295 if I roll over this non-existent balance.   Of course, there is a 3% fee for rolled over balances.  The savings of $295 are from "cash-back" bonuses of 1.18% - which would require spending a whopping $25,000 on the card every year!

Thanks but no thanks, I've done the bit with Discover and it was no real bargain.

So, what's the conclusion?  CreditKarma is no scam, but it is selling you poor bargains and the mindset that you can "get ahead" with cash-back offers and by spending cleverly.   This is the more horrific mindset to get into, if you really want to get ahead.   Not spending money is the idea, not spending it more creatively.

And obsessing about your credit score is also a bad idea.   If you are constantly worried about how much more money you can borrow, your finances are in a ruin.   Stop borrowing, stop spending, and start saving.

If you do, your credit scores will look like the ones above - but you really won't care.



4 comments:

  1. A reader points out that the "Credit score" reported by the various agencies may be similar to,but not necessarily your "FICO" score. I would not worry in any event. Whatever score is being reported will be similar to, or proportional to, the FICO score.

    Again, obsessing about credit score is playing their game. Yes, you should pay your bills on time. No, you should not be going out and borrowing as much money as you possibly can.

    And even with an 800 score, you can't borrow more money than you can pay back. Well sometimes you can, but you still can't pay it back.

    ReplyDelete
  2. Barclay Cards does offer (with some cards) free FICO scores. When you log into your account, you just click on FICO score and it displays it, along with your score history over the last 12 months.

    It is funny how they played this so close to the vest, and now they just give it away. I guess the vaunted FICO score wasn't worth $49.95....

    One caveat, they only update the score every two months ( I am not sure how often the FICO people do this) so right now, I am looking at a score from November.

    ReplyDelete
  3. Capital One offers a "Credit Score" which is the Transunion New Account Model. This is not the FICO score, but seems to parallel it closely. Capital One offers more data on why your score is the way it is, and a score history as well. It also has a "Credit Simulator" that allows you to see what your score would be if you changed certain factors.

    Again, it is really not important in the greater scheme of things, but why pay for something that is FREE?

    ReplyDelete
  4. If Credit Karma goes bankrupt or is sold to another company, what happens to your personal information? In order for them to get your Credit Score, they need your Social Security number.

    This data in the wrong hands... Ouch!

    ReplyDelete

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