Credit Karma: Innovative Business Model

Google and Facebook have got people into the habit of consuming free products.

These companies have figured out a multi-pronged approach to generate revenue for themselves – but in the process, have made it challenging for others to convince people to open their wallets.

While many companies are struggling, a few have come up with innovative ways to generate cash.

Credit Karma is one of them – a personal finance company that is helping people improve their credit score.

“Smart consumers know their credit score affects their ability to get a loan, their mortgage rates, credit card approvals, and even a job or housing application. So it’s a good habit to review your credit report and score frequently – not only for accuracy but also to identify ways you could improve your score.” – Investopedia

If someone with a low credit score is looking for some level of financing, they have to be very careful with what credit products – credit cards, loans, insurance, and other – they apply to. In case their application gets declined, their credit score will take a hit, they will still be in the same situation where they need credit, but will be worse off.

Basically, you need a good credit score to qualify for good financial products. So when you apply to a good financial product with a low credit score, the system penalizes you by reducing your credit score. This will make getting good financial products even harder. 

A lot of people applying for banking products get declined – so banks have a hard time acquiring new customers and the people applying are left with bad credit scores. This is where Credit Karma comes into the picture. 

First, the company offers free credit scores. 

“In the past, the only way to obtain it was by purchasing the score directly from each agency [Equifax, Experian, and TransUnion], which often came at a hefty price.” – Investopedia

Then, using credit score and user’s financial history, Credit Karma recommends what products come with high approval odds. 

When a user purchases a recommended product – user saves money, the bank gets a new customer and Credit Karma takes a commission from the bank.

A win-win-win situation. 

As Ken Lin, CEO of CK, puts it “Credit Score is really one of the defining metrics of a consumer’s financial health. When consumers are looking for credit score, they’re not really looking for a three-digit number – they’re actually asking for what products do they qualify for.”

This insight enabled the company to provide credit scores and credit reporting for free, while capitalizing on the real opportunity to generate cash.

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