Introduction to Credit Karma
Credit Karma is a free credit monitoring service that will allow you to see high-level what your credit score is, and factors impacting it. The service is free, and only does soft pulls on your credit. Credit Karma will monitor your credit score daily, providing alerts when significant events occur that alter your score. Normally with a hard pull the report will give very detailed specifics but will also ding you with a hard inquiry, but since these are soft pulls Credit Karma can do this with no damage to your score. Subsequently Credit Karma will not give the names of institutions that contribute to delinquent accounts. Lenders may find this of interest because you can easily find issues on your report, gauge your interest rate for various types of loans such as a home or simply monitor credit utilization across all accounts. Additionally there is a wealth of information about how the credit industry scores risk. Borrowers will find this service of interest because it will help them understand factors that will impact their rates.
Credit Karma gives you the main categories that contribute to your score, as well as how much they impact it:
Open Credit Card Utilization : Credit Score Weight: HIGH
Percent of On-Time Payments : Credit Score Weight: HIGH
Average Age of Open Credit Lines : Credit Score Weight: MEDIUM
Total Accounts : Credit Score Weight: LOW
Hard Credit Inquiries : Credit Score Weight: LOW
Derogatory Marks : Credit Score Weight: HIGH
The purpose of this post will be to explore some these categories and understand how they affect credit scores. From this we can gain insight into how we filter loans.
The Credit Report
Here is an actual snapshot of my profile “Report Card”
Credit Karma ranks all of these score indicators on a scale of A to F, A being the best and F being the worst. They tell you exactly why they gave you the grade and what the typical distribution is in each category for all people registered with Credit Karma. The score they use is your Transrisk Score which is a commonly used credit score (and usually costs $15-$40 to get from them directly).
Lets take a look at Open Credit Card Utilization:
This is the real data from my Credit Karma account. As you can see having a 0% is actually bad, and considered a higher credit risk on par with having 41-60% utilization I suspect a large portion of investors that use revolving credit utilization start their investing range at 0% and then pick some upper bound assuming starting at 0 is the safest place. From this we can see we may want to start it at 1%. Although testing this on NSR’s Return Forecaster only yielded an additional return of 0.02% for all loan grades. Small, but still contrarian.
Now let’s take a look at everyone’s favorite filter, inquires. We see an almost linear correlation which is identical what we see on NSR’s Lending Club Stats.
The percent of people with 1-2 inquiries is the largest population on Credit Karma. On Lending Club people with 0 inquiries make up about 50% of all loan money on the entire platform, with people having 1 making up the next 30%. According to NSR’s Lending Club Stats, the difference in ROI from 0 to 1 inquiries is 0.5%. So if you are having trouble getting your money to work fast enough on Lending Club you might consider bumping your inquiries to include 1. As you can see from Credit Karma and NSR people with 1 inquiry are still quality borrowers with the potential to still make outstanding returns.
Credit Karma is not only a new way to dissect your credit profile for free, but can also lend some insight into how the credit industry scores individuals. Ironically credit scores have nothing to do with how long you have been at the same job, income, or your savings. It’s simply a measure of how you deal with debt. Lending Club and Prosper have much more elaborate underwriting processes that involve many attributes beyond what FICO provides to determine a borrower’s credit worthiness. Below I have outlined the categories on Credit Karma and how they correlate to Lending Club and Prosper to assist in tweaking your filters if you desire.
|Filter on Lending Club||Filter on Prosper||Notes|
|Open Credit Card Utilization : Credit Score Weight: HIGH||Revolving balance utilization||Bankcard utilization|
|Percent of On-Time Payments : Credit Score Weight: HIGH||Delinquencies (Last 2 yrs)||Delinquencies in last 7y||Percent of on time vs number of non-payments|
|Average Age of Open Credit Lines : Credit Score Weight: MEDIUM||Earliest Credit Line||First credit line|
|Total Accounts : Credit Score Weight: LOW||Total CREDIT Lines||Total credit lines|
|Hard Credit Inquiries : Credit Score Weight: LOW||Inquiries in the last 6 Months||Inquiries in last 6m||Credit scores go back 2 years|
|Derogatory Marks : Credit Score Weight: HIGH||Public Records||Public records in last 12m/10y|
If you would like to see your credit score and gain access to all of the insights it might provide, sign up on Credit Karma (this is not an affiliate link).