If you’ve watched any television over the past few years, you’ve undoubtedly seen advertisements for websites promising free credit reports. What you haven’t seen is how the websites actually make money: Convincing users – often surreptitiously – to sign up for paid add-on products like monthly credit monitoring.
It’s a billion dollar business, even though all American consumers can get an gratis credit report each year by going to annualcreditreport.com. And it generates big profits for companies like Experian PLC, which last year bought the operator of CreditReport.com, and merged it with its FreeCreditReport.com.
Beginning today, however, a three-year-old startup called Credit Karma is looking to disrupt that lucrative model.
Credit Karma originally launched as another free credit report company, albeit one that made money from advertising rather than upsells. Now the San Francisco-based company has launched a free credit monitoring platform – a service that Experian currently values at $15 per month.
“Online Banking Report did an analysis showing that between 25 and 40 million consumers pay for some sort of credit monitoring,” says Ken Lin, founder and CEO of CreditKarma. “We’re offering them a chance to get it for free.”
CreditKarma has enrolled nearly four million users for its free credit score product — which provides TransRisk scores rather than FICO scores — growing by word-of-mouth rather than airing 30-second spots that feature singing pirate waiters. Those users can voluntarily click on related advertising that appears on the site – including for companies Capital One or Progressive Auto Insurance – but CreditKarma itself does not charge for any products or automatically send their personal information to advertisers.
“Around 20% of our users interact with an ad, or apply for an offer, but they have to give consent and nine times out of ten send the information themselves,” Lin explains. “Banks spend around $6 billion a year on online marketing, so there’s a big pool for us, but we are not a middleman for banks to buy and sell your credit data.”
Credit Karma raised around $3 million in venture capital funding two years ago from a consortium that included Founders Fund, QED Investors and SV Angel. Lin says it has been profitable for the past year-and-a-half, and has no plans to raise additional capital.
Sign up for my daily email newsletter on deals and deal-makers: GetTermSheet.com