Credit Karma review

This evening my friend and coworker Frank told me about Credit Karma, a site that allows you to get free credit scores. This site was apparently reviewed by the News and Observer this past weekend that explains a little more about the service but was fairly wordy as a review goes. So, here is my review:

Pros

• Free credit score, something you normally have to pay for
  
• Nice modern website look and feel
  
• Lots of clear information pertaining to your credit score, how it is determined, and what it means
  
• Uses your credit report information for targeted advertising rather than charging you
  
• Does not store your social security number and does not ask for credit card information
  
• Easy to read credit report card helps show you the areas that negatively affected your credit
  

Cons

• Advertisements for new loans, mortgages, and credit cards only account for "lower my payment" based financial situations and lacks intelligence to meet other people's goals (maximize rewards, eliminate debt, etc)
  
• Credit score simulator is missing basic things like what happens if I pay off a specific loan
  
• Credit report card lacks certain vital information. Showing you the number of accounts opened but not listing them or suggesting which to close to help your credit for example seems an obvious extension.
  
• Suggestions can really lack intelligence and you wonder what thought if any was put into it.
  

Overall the service is useful for seeing your credit score for free and I am eager to see what or how much it emails me based on activity.

Will a credit freeze affect my insurance?

I am still considering whether or not we should freeze our family credit reports. Having recently sifted through a credit report, I noticed that my insurance company, Erie Insurance, checks my credit every year. I decided to surf on over to their website to see why they do this and if having a frozen credit report would affect my credit.

Erie is calling what they create with your credit report an "insurance score." They claim that they have found some correlation between people with bad credit issues and risk:

Erie Insurance uses credit information in order to help predict a policyholder or prospective policyholder’s propensity for future loss. Many independent studies have shown that there is a distinct and consistent decline in risk of loss as an insurance score improves. Therefore, the more favorable an individual’s insurance score, the less likely the policyholder is to experience a loss, and vice versa.

Erie further describes how it uses the score on another page:

When evaluating a person’s credit information to determine an insurance score, an insurer only considers those items from credit reports that are relevant to insurance loss potential. Both an insurance score and a credit score are derived from the same thing: a credit report; but they are distinctly different.

The main difference between an insurance score and a credit score is that insurance scores do not take into account a consumer’s income. Unlike a mortgage company, an insurance company is not assessing a customer’s credit-worthiness and therefore doesn’t consider income. Instead, an insurance company only considers those items on a credit report that will indicate future loss potential.

We recognize that people sometimes face difficult circumstances in their lives such as job loss, medical bills or divorce. When we consider an applicant’s insurance score, an isolated instance of a late payment will not have a significant impact on your eligibility. We are looking at long-term patterns and overall responsible use of credit.

Similarly, applicants who use cash for purchases or who don’t have established credit will not be scored negatively.

I assume then a credit freeze will lock in current credit information and move to the last line about people who use cash...therefore would not be scored negatively. Based on that, I believe a credit freeze would not negatively affect my insurance rates.

Credit Cards Cost

Here is an article from Michelle Singletary who is a syndicated columnist whose columns are in the N&O frequently. Here is an interesting quote from it:

Peter Tufano, a professor of financial management at Harvard Business School, has found in his research that transaction credit card users -- those who pay their bills off every month and who are not overly indebted -- are more financially literate.

"Their credit card purchases are under control," Tufano said. "But that is not to say that they are spending less."

Greg Davies at Britain's Warwick University found in one study aimed at marketers that customers using credit cards spend more than those paying with cash or checks in purchasing situations that are otherwise identical in every other respect.

In the end, I understand this is generally true. But, if we would use the credit card for just something like gas and no other purchases, is that still true? I still can't buy it being true in that limited use scenario.

The advice is general, not specific

I Googled recently for Dave Ramsey's credit card study information and found lots of blogs spreading anti-Dave Ramseyisms and I realized that people just don't get it. Dave Ramsey provides general advice which can be applied to everyone. That doesn't mean every piece of advice is the best for everyone, but its good for everyone. For example, someone called in to his show a couple month's ago and asked about 529s. He admitted on the show that not all 529s are bad, but some of them are so its easy to just say avoid them all. Looking into it, I found that some states limit investment choices and charge high fees for their 529s. If you are in a state where you can invest in a mutual fund with a long track record (10-15 years) that has low fees and get a tax deduction for doing so, I believe he would say that is a good choice. But, since not all states and 529 plans are like that, its easier to suggest other investment methods when they exist and also are tax advantaged.

Other areas where I think he gives general advice are the amount to save on retirement and never to use credit cards. The amount to save for retirement he suggests is 15% (once consumer debt is paid off) of your gross income. Advice can't possibly be global like that and perfect for everyone no matter their age, salary, and family situation. So, he gives the best rule of thumb, 15%. You can calculate how much you will need for your particular lifestyle, salary, and age and probably come up with a better figure for yourself. But, if you can't figure it out, 15% of gross will probably work.

Another example is credit cards. Dave says the following:

You’re also paying more. A study by Dunn and Bradstreet showed that the credit card user spends 12 to 18% more when using credit instead of cash. After McDonald’s began taking credit cards, they found that people spent $5 to $7 more per sale.

If someone was disciplined and got a credit card purely for gas purchases making 5% cash back (instead of rewards they will never use)...I doubt they would buy 12-18% more gas just because they are using the credit card or they will buy gas from places with 12-18% higher prices than they would have with using cash or a debit card. The fact is most Americans are not this disciplined. So, a better general rule is to avoid the credit card altogether.

Would Dave agree with that? Not sure, but I believe it :-)

Opt out of pre-approved credit cards

One of the other things NoScamNC.gov suggests is to opt out of pre-approved credit cards. To do that, you can go to OptOutPrescreen.com. This means that no one will be able to pre-approve you for a card by looking at your credit report before you ask them to, known as prescreening. It won't stop the offers, just stop the pre-approved ones. They give you two options, first to opt out electronically for only 5 years or to mail in a signed piece of paper for permanent opting out. Obviously, they want you to not stay opted out which is why they require the paper to be mailed. But, fill out the permanent one and it will give you the 5 year electronic one while you file the permanent paper one.

Freeze! Or should we?

One of the looming questions regarding finances I have is whether to not to freeze our credit reports. We don't get new loans or credit cards ever really, so that wouldn't be a problem at all. So, a credit security freeze may help prevent identity theft since if someone stole our identity, they wouldn't be able to go to a company who pulls our credit report to give us a card or a loan. There are a couple outstanding issues:

1) How often will we have to unfreeze our credit report for non-debt items?
2) How much theft does this prevent? I understand there are some credit companies that don't look at credit reports.
3) Is it overall worth the $30/person to freeze the reports when we will have to also pay $10 for each temporary unfreeze.

Some of these issues are covered in this USA today article. There, Sandra says:

Many consumers are unaware of how often their credit histories are reviewed. Even if you don't plan to borrow money, you might need to suspend a credit freeze to get an insurance policy, utility service, an apartment, or even a job. If you lose your cellphone, your provider probably won't give you a new one until it verifies your credit.

I recently saw this when calling my company's HR solution to add our new baby girl. To verify my identity because I typed in my pass code incorrectly, they asked me for some information to confirm my identity which they only could have pulled from my credit report like a previous address from years ago. What would they do if my credit report was frozen? Would they deny my request to change my health care coverage?

Even when planning ahead, do you remove the freeze on all 3 reporting agencies or try to figure out which agency the company you are working with uses?

The state of North Carolina also has some good information here at their site NoScamNC.gov. They do suggest freezing your credit to protect yourself. They also have some other suggests which I thought were good recommendations.

Of the major credit reporting agencies, only one allows you to initiate a freeze online. That one provider is Experian whereas others like TransUnion and Equifax require mailed in letters. Equifax seems to be pushing you to use their monthly credit security services instead with a minimum monthly payment of $9/person.

The good news is that they all take credit cards :-)