With consumer loans increasingly difficult to obtain, Americans are putting more effort into attracting lenders by monitoring and improving their credit scores. That’s led to more traffic for monitoring sites. And it’s resulted in an increasing amount of interest in the credit score industry from investors.
Over the past two years, venture and angel investors have funded at least a half-dozen startups offering tools to track credit scores, view offers from lenders, and protect against identity theft.
Last week, the latest credit score-focused funding recipient, San Francisco-based CreditKarma.com, announced that it raised $2.5 million in a Series A investment round to build up its advertising-supported business.
QED Investors led the round, with Founders Fund, Silicon Valley Angels and individual investor Aydin Senkut also participating. Previously, CreditKarma raised just under $1 million from angel investors.
The company, founded in 2007, allows people to log on and see their credit score at no cost. The service is supported by lenders, who can target advertising based on consumers’ credit scores, location, and other attributes.
“We realized that there are about 30 to 40 million Americans who are paying to access their credit score on an annual basis,” said Ken Lin, CreditKarma’s CEO and founder. “We thought, ‘Wouldn’t it be better if we could give the service away for free?'”
Currently, the website boasts more than 800,000 registered users. In addition to credit reports, the site offers tools for tracking how daily financial behaviors impact credit. With the money from the latest funding round, Lin said he’s hoping to create another tool that will match consumers with lenders who can refinance outstanding loans to lower rates in real time.
CreditKarma competes with a number of free and paid services. Among the largest is FreeCreditReport.com, which offers consumers a free credit report in exchange for a trial subscription to its credit-monitoring service. However, it’s not entirely free. Consumers pay $15 a month for the service if they do not cancel before the seven-day trial expires. Another competitor is Quizzle, which offers a free credit report every six months, along with tools for managing personal budgets and home payments.
Lin said the economic downturn has spurred consumer demand for credit reports and tools to improve scores, as those with marginal ones have great difficulty securing loans today. The recession has put pressure on another part of CreditKarma’s business, which consists of selling advertising to lenders. Lin said he expects sales will improve as the site becomes more established and more advertisers recognize it as a cost-effective alternative to direct mailing.
So far, investors have been most receptive. Lin said the latest $2.5 million funding round was in line with what he’d set out to raise.
Joanna is a senior editor with Private Equity Week