Why 75 million people have joined Credit Karma

Credit Karma had a problem. How does a financial-services company win the trust of a generation that just lived through a financial crisis? And a new, online company that asks for your personal information, at that?

Today, a decade after its launch, Credit Karma claims 75 million members, including almost half of all U.S. millennials and a third of all Americans with credit reports. The private, San Francisco-based company, which says it has been profitable for the past two years, recently revealed that its revenue jumped 50 percent last year, to more than $500 million.

Now the site, known mostly for giving out free credit scores and helping people find auto loans and credit cards, wants to remake Americans' financial lives from top to bottom, and it's starting with two of the most complicated and unpleasant tasks of all: filing taxes and getting a mortgage. This year the company launched both a free tax preparer and a new service to streamline the process of securing a home loan.

"Our goal is to be the best product [in] the whole spectrum of financial-services products that consumers could use help on," founder and Chief Executive Officer Kenneth Lin said. "There is a real opportunity in this space to change consumer finance." Among Credit Karma's competitors: NerdWallet, Credit Sesame, and Credit.com.

Banks pay Credit Karma every time a user of its site is approved for a credit card or loan. The key is to recommend the right products to each customer, and that requires collecting lots and lots of data. Every day, the site collects 2.5 terabytes of information on its members, then runs billions of calculations to find products that suit their needs and creditworthiness. Members hand over personal information, including Social Security numbers, giving access to their credit bureau files.

For that business model to work, consumers need to trust Credit Karma. At first that was a tough sell. The site was having trouble catching on with consumers at the same time that the recession and its fallout had made banks reluctant to lend. "We literally almost went out of business," Lin said.

There were obvious solutions that he resisted. He could have made millions of dollars by selling his customers' data to third parties, or by promoting products like exploitive "credit repair" services, but refrained. Credit Karma was careful not to spam members with incessant emails.

"This is the slippery slope many companies go on," said Nichole Mustard, chief revenue officer and a co-founder. "Ultimately you lose the trust you've built with members."

Credit Karma offered truly free credit scores when many sites were advertising such services but sneaking in fees. The company also built a service that helps members dispute and remove errors from their credit reports, and says it has made $8.4 billion in corrections so far. This year it began helping members look for unclaimed money, such as balances in old bank accounts or rebate checks that were never cashed. It says it found $100 million in two months.

The company has worked to win consumers' faith in less obvious ways. For example, Mustard's team vets lenders before they're allowed on the site, banning payday lenders and the like. You'll still find plenty of debt products there charging high interest rates-if you have a lousy credit history, they may be your only option. But for short-term, high-interest loans, Credit Karma requires banks to take extra steps to make sure members can pay the money back, by going beyond credit scores to verify borrowers earn enough income to handle the loan.

"You don't want to put them in a cycle of debt," Mustard said.

The strategy appears to be working. The company added 70 million of its 75 million members over the last five years, it says. By now, about half of Credit Karma's new members come from word of mouth, Lin said.

The new tax-filing service is a bid to lure even more members while collecting high-quality data on them. Completely free, including the filing of state returns, it's a direct challenge to the country's two dominant tax preparers, H&R Block and Intuit's TurboTax. About a million taxpayers filed with Credit Karma this year.

Lin, 41, admits the online service wasn't as user-friendly as he would have liked. "Each successive year you're going to see a marked improvement in the product," he said. "We're in it for the long haul."

It may take even longer to build a mortgage service that meets his expectations. Getting a mortgage is a painful and unpredictable process that requires reams of paperwork and also scares away homeowners who would benefit from refinancing. A basic mortgage-shopping service is up and running, for residents of fewer than half of U.S. states. Lin wants to do much more to streamline the process.

"If you reimagine mortgages, and you actually took a bunch of the friction out, people would spend the time to refinance and get themselves into a better situation," Lin said.

That will require working with lenders to overhaul their mortgage processes. Changing the way the U.S. banking system handles $9 trillion in mortgage debt is an ambitious goal. It's only imaginable because of the clout that comes from Credit Karma's membership.