CreditKarma: Never Pay for Your Credit Score Again!

I feel like a moron. Just two weeks ago I paid $14.95 for three-month access to my credit score. Let me tell you a little story about how this began:

My neighbor, four doors down, has the same name as me, with the minor difference of a different middle initial. Her middle initial, happens to be that of my maiden name. Because I hyphenated my last names for the first few years after I was married, I have a registered “credit alias” that is exactly the same as her name, and a mailing address just a few digits off.

That really isn’t too much of a problem, except that because our addresses our so similar, and she doesn’t pay her bills, her collections accounts arrive on my credit score routinely.

Four more of these recently appeared on my credit report and were discovered by my mortgage bank during my refinance. I shot off another letter to TransUnion last week hoping to intervene before my rate-lock was threatened.

I’ve got to say, I’m pretty tired of paying for my own credit score. Yes, you can get a credit report free annually, (just one) but it’s far more helpful in a situation like mine to check it more frequently than that.

Finovate 2009 presenter, CreditKarma may be the solution people like me are looking for. It provides constant, free access to your credit score as well as some other features.

You can see how your credit score stacks up to those in your age range, state, or even email domain. You can also use their calculator system to see how adjustments in your financial situation would affect your score in theory. Would it help or hurt you to close a high-interest account, extend your credit limit, or even file for bankruptcy? I was surprised to know that paying off my credit card balance entirely will actually hurt my score, and that optimally I should be carrying some credit card debt. (Thanks anyway, but I’ll still be going debt-free). There’s a screen to view your long-term credit score over time, which will be very helpful for tracking identity fraud or excessive credit inquiries (which cost you points).

The site is free because of sponsorship (think Mint), but I found the sponsorship to be rather oppressive and cluttering. However, not so much that I won’t be using CreditKarma. Also, be reassured, that they fund the site through ad partnership only, not through selling your personal info.

There are some features that I especially like including a credit card debt calculator which allows you to either enter your projected monthly payment and calculate a payoff date, or enter a date and it will show you your estimated monthly payments. Adding a little extra value to this calculation is their friendly nudge that shows you how much you can cut your payoff time by paying just a little bit more.

At this time, CreditKarma is only showing credit scores from TransUnion, and not Experian and Equifax, but in my experience, TransUnion’s scores have always been the lowest (They’ve also been the only ones routinely confusing my neighbor’s accounts with mine).

Because CreditKarma is requesting your score on your behalf rather than for a lender, your credit score won’t be affected by the inquiry.

Jessica Ward is a freelance writer and blogger located in Seattle, WA. She blogs on finance, credit, family and food at http://www.pennywisefamily.blogspot.com/.

Prosper improves lending and borrowing experience

Prosper just announced some significant site and policy updates. Loan listings now include borrower's past activity, borrowers can make payments with their Prosper cash balance, borrower activity including all past activity will be reported to TansUnion in addition to Equifax, and the referral program has been extended through the end of the year. These changes have been well received by the Prosper community after the recent controversy.

Here's an excerpt from the announcement:

Listings now include borrower's past Prosper activity

Borrowers taking a second (or third or fourth?) Prosper loan will now have their Prosper payment activity recorded on the listing page and on their member page. This includes total loans, principal borrowed, on time payments, total number of loan payments which brought a loan current which were made at less than and more than one month past the due date, total payments billed, credit grade history with dates, and credit grade change.

Advanced search and standing orders have also been updated to allow lenders to search and bid on loans that meet certain criteria in these departments.

Borrowers can make payments with Prosper account

Borrowers can now make payments on their Prosper loans using funds from their Prosper cash balance, if they have at least $25 available.

Borrower activity reported to TransUnion

Borrower payment activity is now reported to TransUnion, one of three major U.S. credit reporting agencies. Payment activity is already reported to Experian. We hope to start reporting to Equifax, the third major credit reporting agency, shortly.

All historical Prosper loan activity to date, including payments, delinquencies, and defaults on active and ended loans will also be reported to TransUnion.

Improved messaging on listings cancelled during review

One big point of frustration for borrowers whose listings are cancelled during review is that they don't receive a specific reason for why their listing was cancelled. This can range from the serious (name on bank account doesn't match borrower's) to the benign (hasn't yet verified bank account ownership).

From now on, when a borrower's listing is cancelled during review, the borrower will receive a message with a specific reason (or reasons) why their listing was cancelled, whether they may re-list or not, and possibly a note from customer support about what they should do before their next listing to ensure that the listnig will not be cancelled. Lenders will also receive a message with a specific reason.

Loan numbers tied to listing numbers

Borrower loans are now tied to their listings, both on the borrower's member page and in the API. On the borrower's member page, you can see each loan's balance and payment performance in a simple table.

Invite friends from Outlook, Gmail, Hotmail, AOL, Yahoo mail, etc...

When you invite your friends to Prosper (and earn referral awards), no more need to copy and paste their email addresses into the "Email address" field. Just click the "Add from my address book" button, and go to town.

Search help pages

Now you can search the Prosper help pages using keywords.

Referral program extended to Dec 31, 2007

The referral program has been extended until Dec 31, 2007. Invite a new borrower and earn 0.5% of his or her loan value when their loan gets funded, or invite a new lender and you both get $25 when your friend funds his or her first loan.

Over 5,000 members have successfully referred a friend since the program started in June. Everyone who refers a friend by August 31 will receive a stylish black Prosper T-shirt, and also be entered in our "Prosper in Las Vegas" sweepstakes.

Credit scores on Prosper and how to get a free credit report: Part 2 of 2

In part 1 of this article, I discussed the distribution of credit scores, how credit scores are used on Prosper, and the distribution of borrowers on Prosper. In this article I will describe how you can obtain a free credit report, dispute a claim, and why it is important to have good credit.

Free Credit Report. In 2003 congress passed an amendment to the Fair Credit Reporting Act (FCRA) requiring each of the consumer reporting companies (Equifax, Experian, and TransUnion) to provide you with a free copy of your credit report at your request every 12 months. You can request this report by phone, by mail or on the web at AnnualCreditReport.com. The Federal Trade Commission has created a website to inform consumers of their options, as well as to warn consumers about impostor websites and services.

At AnnualCreditReport.com you have to fill in a form, provide them with your social security number, and answer some questions to prove your identity. After that they walk you through obtaining one credit report at a time from each of the three agencies. Each time you switch to a new agency you have to prove your identity again by answering questions based on information they have on file. Once you have completed the process you will have a report from each agency that shows your credit accounts and several years worth of payment history. What they don't provide you with is your actual credit score number. You have to pay if you want to see that. [Edit from Tom: See note at bottom on how to get Experian credit score for free as well.]

After looking through the data, it is possible that you will find an inaccuracy in your report. You will want to check all three reports because they will all be different. If you do find a mistake, don't fall for advertisements from companies that claim they can help you clean up your credit, quickly improve your credit score, or remove negative information such as late payments or bankruptcies from your credit record. Companies that advertise these services are usually fraudulent or are charging you fees (sometimes very expensive fees) for something that you can easily do yourself for free.

Disputing a claim. The websites for each of the consumer credit companies offer instructions for disputing a claim. They can be found at:

• Disputing a claim at Equifax
• Disputing a claim at Experian
• Disputing a claim at Trans Union

If you dispute an item on your credit report the credit agencies are required to contact the lender and verify the disputed information. They are then required to let you know whether they were able to verify the information and who they talked with at the lending institution. If they cannot verify the information they are required to remove it from the report. My advice is to actively dispute any items that you know are incorrect. However, if you have legitimate negative information on there then don't bother to dispute it. The credit agencies do make mistakes, but they are also pretty good at verifying the original information, so if the negative information is correct than just work on improving for the future. As the negative information gets older your credit score will improve.

Identity theft. If in this process you discover you have been the victim of identity theft you can find information on recovering from identity theft at the Federal Trade Commission's website.

Free credit check from Prosper. Okay, so now you have your free credit reports and it will be a year before you can pull another official free credit report. What can you do in the meantime to keep an eye on your credit? Well, you can continue to get monthly reports at a cost of $9.95 per report or sign up with third party monitoring services for a similar fee. But, what if you want to do it for free? One lender on Prosper hopes to do just that. His plan is to routinely go part way through the process of creating a listing on Prosper as a borrower, until he gets to the point where it shows his Experian credit grade, and then cancel the loan process. This only works with Experian, but he hopes that by doing a similar process at other peer to peer lending sites he can check with other agencies. He figures that "it is a free and easy way to make sure my identity hasn't been stolen (at least by someone who applied for an account that checked Experian). I will probably sign up at Lending Club as well to monitor my Transunion report. If Zopa ever launches and uses Equifax I will be all set." This may work to some extent but it will not actually provide you your credit score (just Prosper's credit grade) or the detailed information that comes with a normal credit report.

Cost of poor credit. So, why all of the worry about checking and monitoring your credit? If you have got this far in the article, you probably understand the importance of having good credit. Having poor credit increases the amount that you have to pay for home and car loans. But what makes it even worse is that it can ruin marriages, contribute to poor health, and can even affect what job opportunities are available to you. One analyst at TheStreet.com suggested that having a poor credit score could cost you over $1 million dollars.

If you do monitor your credit, you should be aware that you may experience a significant change in your score this fall. Don't panic right away, it could just be due to FICOs change in their scoring algorithm. FICO is adding two additional categories on the low end of the scale, and eliminating the benefits of being an authorized user on a credit card with someone that has good credit. This has the potential to negatively affect tens of millions of scores, so be on the lookout for that change.

Update from Tom: Experian runs freecreditreport.com which provides users with a free credit report and credit score. This is seperate from AnnualCreditReport.com which provides you with one free credit report per year (without score). To get your free detailed credit report on Experian's freecreditreport.com you actually sign up for the Triple Advantage Credit Monitoring program which costs $12.95/month but if you cancel within the first 30 days it is free.

Credit Scores on Prosper - Part 1 of 2

Credit scores are the most important indicator in determining what rate you will pay when you borrow money. The worse your credit score is, the more you will have to pay in interest on your loan. Your credit score is made up of a number of components including the length of your credit history, the amount of debt that you carry, recent credit inquiries by lending institutions, and the number of late payments or defaults that you have on current or prior debt. Sometimes this score is called a FICO score because it is generated with software from Fair Isaac and Company.

There are three credit reporting agencies that produce credit scores: Equifax, Experian, and TransUnion. Each of these collect information about borrowers independently and the accuracy and quantity of information on a borrower can vary among the credit agencies. Because of differences in the data collected, the score for a given borrower can also vary among these credit agencies. Some lending institutions partner with one of these credit agencies and use them as an exclusive provider of credit scores and content, while others obtain data from all of the credit agencies when making a loan decision. Prosper exclusively uses Experian while Lending Club exclusively uses TransUnion for their credit data.

According to MyFico.com the distribution of credit scores for the general population is heavily weighted to the higher end of the spectrum with most scores falling above 700.



Prosper uses credit grades rather than displaying the raw credit scores. The following is a chart that explains that correlation.

Grade	AA	A	B	C	D	E	HR
Score	760 and up	720-759	680-719	640-679	600-639	560-599	520-559

I must say that when I came across this data I was quite surprised by this distribution. Matching the two sets of data together, we realize that E and HR borrowers combined represent only about 11% or 12% of the population (people below 520 cannot currently borrow on Prosper). Nearly half of the population falls into the AA or A credit groups.

Okay, ready for some shocking statistics? Here is the current breakdown of active loan listings on Prosper as of the writing of this listing:

Grade	AA	A	B	C	D	E	HR
Number of Listings	54	56	113	230	382	500	1308

Roughly half (49.4%) of the current loan listings are for HR borrowers, with only 2% for AA borrowers, and 2% for A borrowers. This is shocking when you consider that combined A and AA borrowers make up half of the general population while HR borrowers account for less than 10% of the general population.

One effect this has is that when lenders see an A or AA listing they think they are lending to the cream of the crop - the top 4% of borrowers. While, when lending to Bs or Cs they may be thinking, "This isn't too bad, I am still in the top 15% of loans". In terms of the number of Prosper loan listings they would be correct. However, in terms of the general population, lending to AA and A borrowers just puts you in the top half of borrowers, while Cs could put you in the bottom 25%.

This also clearly demonstrates that many borrowers are using Prosper as a lender of last resort. People who are unable to obtain credit elsewhere because of their low credit scores are flocking to Prosper in an attempt to obtain financing on their loan. Anyone with a score below 620 is considered subprime, which is the middle of the D credit grades on Prosper. With scores below that, many of the Es and most of the HRs would find it difficult to obtain a loan at any rate from traditional financial institutions.

The distribution of loan requests on Prosper suggests that Prosper is having difficulty attracting mainstream borrowers in the higher credit grades. This makes it difficult for lenders that want to lend large sums of money to borrowers in the top credit grades. These lenders are forced to spread the money out over a long time period, or aggressively bid down the rates on the small number of loan requests in the high credit grades. (See my previous article for why someone with good credit would want to borrow from Prosper.)

This is part 1 of a 2 part article about credit grades. Watch for an upcoming post in which I will describe how you can obtain a free credit report, dispute inaccuracies on your report, and monitor your credit. In part 2 I will also discuss how much it can cost you to have a poor credit score.

Edit/Clarification: In this post I compared FICO scores in the top graph to Experian's ScoreX scores used by Prosper. FICO scores run from 300-850 while ScoreX are from 330-830. There is really no one in the 830-850 range anyway, so trimming that doesn't really have an effect (same onthe bottom end of the scale). Although Experian's ScoreX scores are mathmatically scaled to match FICO scores they are produced by a different algorithm and could result in slightly different data. The overall analysis in this post should hold but the percentages may vary. Here's a short explaination from Wikipedia on the difference betwen FICO scores and Experian's ScoreX score:

For easy use, most scores are mathematically scaled so that they fall in the general range used by prominent scoring model competitors. Since the Fair Isaac Corp. provides the dominant scoring method, non-Fair Isaac method-generated scores often mimic FICO scores, (they often are derisively called "FAKO" scores).[1] Although not as widely used, these scores (e.g. TransUnion's "TransRisk", Experian's "ScoreX", and "PLUS" scores), are less expensive for borrowers to buy than is the FICO score. The business cost savings of buying and using non-FICO scores is financially tempting to some banks and credit card companies to use, as they need accurate risk assessment of millions of accounts.

Update: Part 2 of this article, which covers free credit reports, claim disputes and the importance of good credit is here.

Stop credit card junk mail

As I mentioned a couple days ago, Lending Club does a great job educating readers through their blog about basic finances. Most of their material is not technical and seems to be geared to someone getting their first credit card. Today they had a post on how to stop credit card junk mail.

I didn't know it, but since December 2004 all the major credit reporting agencies (Equifax, Experian, Innovis and TransUnion) have hosted optoutprescreen.com, a website which will allow you to stop the credit card junk mail. Credit reporting agencies make money by selling your information to credit card companies through a process called prescreening. If you meet certain requirements (usually credit score) then you are pre-approved for various credit card offers. This is where all the credit card junk mail comes from. This is the purpose of the opt-out website:

"Under the Fair Credit Reporting Act (FCRA), the Consumer Credit Reporting Companies are permitted to include your name on lists used by creditors or insurers to make firm offers of credit or insurance that are not initiated by you ("Firm Offers"). The FCRA also provides you the right to "Opt-Out", which prevents Consumer Credit Reporting Companies from providing your credit file information for Firm Offers."

Opting-out of credit card offers will not help your credit score because "firm offers" made through the prescreening process are not used in calculating scores. It may indirectly help your score if you have a tendency to apply for every new credit card offer that comes in. Removing your name from the list will also not affect your ability to apply for credit. Are there any advantages to receiving prescreened offers? The credit reporting agencies put their positive spin on the credit card junk mail:

• Consumers are provided with product choices
• Consumers learn about and have an opportunity to take advantage of offers that may not be available to the general public
• Firm offers help consumers to “comparison shop”, which may increase a consumer’s buying power.

If you are interested in opting out of these prescreened offers you can do so here:

Opt Out of Credit Card Junk Mail

Thanks for the tip Lending Club. Has anyone used this website to stop credit card junk mail? Does anyone prefer to continue to receive these offers?