Credit Karma is on a mission to disrupt the consumer lending business.
The San Francisco company, which formed in 2007 to educate consumers about their credit scores and loan options, recently raised $85 million from Google Capital and other deep-pocketed investors.
With the funds, Credit Karma intends to more than double its staff — to roughly 300 by the end of the year — as it works toward its goal of offering consumer loans through its own website. Credit Karma would not be the lender; rather it would host an underwriting service that shows users what loans they qualify for and lets them obtain lines of credit with a few clicks through its own site rather than the lenders'.
Credit Karma's planned expansion represents part of a trend in which upstart financial advice firms are expanding their credit monitoring services to gain advertising revenue or to collect new fees on premium services at a time when more companies, including credit-card issuers, are distributing credit scores for free.
Credit Sesame, another upstart that offers free credit scores, recently introduced an identity protection service, while rival Quizzle has enhanced its software to tell users why they got the score they got. Credit Karma, meanwhile, aspires to become the place people visit to find the best possible loan — similar to the way Kayak provides visitors with optimal flight options and prices.
"We are trying to move past credit scores," says Ken Lin, the chief executive and founder of Credit Karma.
Credit Karma makes its money by letting lenders advertise on its site. As Credit Karma keeps customers informed of their credit scores, it also pitches loan products and lets users click through advertisements to apply for credit. (Think Intuit's Mint model.) The company generates 600,000 to 800,000 credit applications per month, says Lin.
Credit Karma will not share approval rates for those leads or disclose how many lenders it works with. It provides more than 20 million consumers with access to their credit scores from TransUnion and VantageScore, a credit rating product offered by TransUnion, Experian and Equifax.
Its goal is to eliminate all those click-throughs by showing consumers only the loans for which they qualify and at what rates. If that makes the process of shopping for a loan easier, Credit Karma could attract more lenders to its site and thus make more money.
Quizzle, a Detroit company, is also stepping up its game as it looks to remain competitive. It recently upgraded its premium service (which lets users get credit data monthly versus twice a year) by integrating VantageScore's ReasonCode.org software into its software with a goal of helping consumers better understand why they received a certain credit score and how they can improve it.
"It's taking the data and making it simple to understand," says Todd Albery, Quizzle's chief executive officer of Quizzle.
Adrian Nazari, the founder and CEO of Credit Sesame, says firms like his got their start because consumers are starving for financial advice.
"If you see a score on the financial statement from the bank, it's good to know but the question is what now?" says Nazari, who founded Credit Sesame in 2006. "The credit market is a new frontier."
Credit Sesame, which distributes Experian credit reports and scores, offers credit monitoring and other tools to help consumers reach their financial goals. It also recently added an identity protection service for $9.95 a month.
To be sure, the credit score is core to what Quizzle, Credit Karma and Credit Sesame offer consumers. And their services, which are gaining in popularity, are one of the pressures driving issuers and credit bureaus to be more forthcoming about their customers credit scores in recent months.
Barclaycard US, for example, recently started to send email alerts to credit card customers about their score changes. Discover Financial Services and First BankCard, using a new program available from FICO, also publish credit scores to their credit card customers — at a time when regulators are encouraging lenders to do so.
More issuers are expected to follow suit, in part, to respond to the rise of financial advice upstarts' services.
Such credit score-related sites "will challenge our industry to become better at credit education and to provide free credit scores to consumers," says Mihaela Kobjerowski, vice president of First BankCard, one of the first issuers to distribute FICO scores to customers. "I think any service that can educate the consumer on credit scoring is good for the consumer and financial institution in the end... Competition is always good in making companies better."
Better credit education could also help borrowers become better at paying their bills on time, she adds.
The software companies are also pressuring a design trend in the personal financial management (PFM) category at large: advice served over the data that requires little work of the consumer.
"This is what PFM should be," says Ron Shevlin, senior analyst at Aite Group. "It's not just budgeting and expensing but truly managing the personal life and seeing the impact of certain actions."