- Understand how Credit Karma works.
- See how they earn revenues.
- Learn who Credit Karma’s competitors are.
Do you know your credit score? Credit Karma will show it to you for free. How does a company offering free services make money? This article reviews Credit Karmas' revenue model.
Credit Karma makes money by charging referral fees, interest on cash, and interchange fees. Founded in 2007, this fintech firm helps Americans manage their finances and investments, allowing them to control their spending, saving, and investing.
Intuit acquired the company in 2020, paying $7.1 billion in cash and stock for the company. So, what does Credit Karma do, and how does it earn money?
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What does Credit Karma do?
Credit Karma launched in 2007, right before the onset of the Great Financial crisis of 2007/2008. The founder started Credit Karma after frustration around retrieving his credit score.
Private firms offered to retrieve users' credit scores, but many of them had shady reputations. With the launch of Credit Karma, Americans now had a third-party provider they could trust with personal and financial information.
Credit Karma launched in March 2008, offering users the chance to find out their credit score without going through credit bureaus like TransUnion or Equifax.
How does Credit Karma work?
Credit Karma is a leading fintech company specializing in the financial well-being of its users. The company primarily focuses on providing its clients with total credit transparency. Consumers can sign up for Credit Karma on the company's official website or through its mobile app available for iOS and Android devices.
After setting up their account, users can access their credit information immediately and at no cost. Since credit scores determine the rate at which financial institutions loan money, it's useful for consumers to have this data on hand.
Users can check their score at any time without impacting their current credit score. Typically, you get one free review of your credit score with a credit bureau per year. When a retailer or lender issues a credit inquiry or request for your credit score, it actually adversely impacts your credit score.
By having their credit score on hand, consumers don't have to worry about a finance partner rejecting their application because they don't know their credit score or if they fit the lender's requirements.
Apart from issuing free credit scores, Credit Karma also offers a range of services, including a free credit report and free credit monitoring. The credit monitoring feature of the app is useful for alerting you to anyone that's attempting to access your credit score to commit identity theft or fraud in your name.
Consumers can also use the function for checking on their credit health, with the app giving them a 30,000 foot view of their current debt and credit obligations.
Credit Karma utilizes TransUnion and Equifax as its credit bureau partners, basing credit information on the Vanguard 3.0 model, not the FICO model.
How Credit Karma makes money
Credit Karma makes money from interchange and referral fees, and interest charged on cash loans (which is a common practice at larger financial institutions).
Referral commission
The primary revenue stream for Credit Karma is referral commission. While Credit Karma is free, it includes in-app advertising for related financial services products such as credit cards or loans. Each time a user takes action on an offer, Credit Karma receives a referral fee from the advertising partner.
Some users complained that they didn't enjoy the in-app advertising, but Credit Karma stuck with the model, and it's doing well. While some users might find this strategy unethical, Credit Karma makes up for its transgressions by offering its users a bevy of free services.
Some of the useful features found on the official website include a handy tax calculator and a dispute response that enables users to file complaints if they feel the credit bureau undervalues their credit score.
Interchange fees
Credit Karma revolutionized banking when the company announced it would start offering clients checking accounts.
This feature, also known as "Credit Karma Money," issues the account holder with a debit card. The cardholder can use it at any merchant for paying for goods and services, just like they would with a standard debit or credit card.
When clients use their debit card for processing transactions, Credit Karma earns a fee. Typically, these processing fees come in at under 1% of the transaction value. The merchant is responsible for paying for the costs, with the account holder having no financial liability in the transaction.
Interest on cash
Credit Karma also operates a similar interest on cash model as other financial firms and banks. The company uses the cash in its clients' accounts to facilitate loans to larger financial institutions like banks. Credit Karma receives net interest margin on outstanding amounts held by its institutional clients in return for facilitating the loan. The company earned close to $3 billion in revenues in 2019 using this financial model. Credit Karma also protects client accounts with FDIC insurance for up to $5 million.
Future growth engine
According to Credit Karma's CEO, the company operates on a 10 year horizon. It hopes to become the market leader in digital financial assistant services. Its platform processes millions of hard data points in the financial markets to provide its users with the financial information they can use to better their position.
The company hopes to continue to innovate in the space, providing consumers with further releases of beneficial digital financial tools designed to help them manage their finances.
Competitors
Credit Karma is a leading fintech providing a range of financial services designed to improve consumer financial health. As a result, it has several competitors in the same market. Here are the top competitors to Credit Karma.
- NerdWallet. This online platform allows users to receive insights and information on their financial status.
- Bankrate. This consumer finance company offers users a range of similar financial services to Credit Karma.
- Credit Sesame. This fintech offers users the chance to utilize its free personal finance tools, providing consumers with savings on credit applications and loans.
- Mint. This personal finance application helps users manage their budget and their bills.
