Credit Karma Giant Settles $3 Million FTC Fine for Tricking Customers into Applying for Pre-Approved Credit Cards Resulting in Denials and Lowered Credit Scores

While shopping for a credit card or loan, finally, these words flash across your computer screen, “You’ve been approved for a credit card.” Or you open a letter to see those same magical words, written in bold, “You’ve been approved for a credit card.”

Imagine the thrill you’d feel to know you’re getting a chance for some new plastic to buy goods on credit.

But according to the Federal Trade Commission(FTC), consumers who received “pre-approved” credit offers from Credit Karma weren’t approved for credit. Consumers who applied for pre-approved credit cards spent fruitless time doing so because their credit scores dropped significantly when their applications were denied, a denial that results from a “hard inquiry” against their credit report.

Earlier this year, FTC hammered out a tentative lawsuit settlement against Credit Karma for a whopping $3 million stemming from the company’s deceptive trade practice. The announcement of the settlement happened on September, 1st, 2022.

Pre-Approved Credit

Does a Credit Card Preapproval Offer Guarantee You’ll Get It? – NerdWallet

ftc samuel levine. image source: linkedin
FTC Samuel Levine. Image source: Linkedin

“Credit Karma’s false claims of pre-approval credit cost consumers time and subjected them to unnecessary credit checks,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “The FTC will continue its crackdown on digital dark patterns that harm consumers and pollute online commerce.”

Dark patterns involve the use of an interface designed to deceive users in non-intuitive ways. These unique patterns were the focus of a workshop held last year for the public by FTC. Evidence showed almost one-third of pre-approved offers resulted in denials.

Credit Karma Denies Allegations

Credit Karma representatives categorically denied the allegations of fraud yet still the company settled anyway.

credit karma chief legal officer susannah wright
Credit Karma chief legal officer Susannah Wright. Image source: Crunchbase

“We fundamentally disagree with the FTC’s allegations about marketing terms that aren’t even in use anymore,” explained Susannah Wright, to news media outlets. Wright serves as chief legal officer at Credit Karma.

Credit Karma provides tools allowing consumers to monitor their credit scores and credit reports. People signing up for Credit Karma’s services provide the company with personal information which allows them to compile over 2,500 data points on each consumer, including credit and income information.

Next, the company utilized the collected information to send targeted advertisements and recommendations for financial products such as credit cards. – Get your free score and more – CreditKarma

FTC Lawsuit

The FTC lawsuit alleged that Credit Karma deceived people nationwide by falsely claiming they had been selected for a pre-approved or had “90% odds” of approval for credit cards or loans offered by banks and lenders that used CreditKarma to promote their financial products.

These pre-approved offers, according to the FTC, tricked consumers into applying for offers that, in many ways, the consumers did not qualify for.

The FTC order requires Credit Karma to pay $ 3 million to be disbursed to consumers who wasted time applying for Karma’s credit cards and for the company to cease making such false pre-approval claims.

The lawsuit further alleges that, from February 2018 until April 2021, CreditKarma falsely told consumers they’d been “pre-approved” for the credit offers which led individuals to apply, and since the individuals didn’t qualify this also resulted in a hard inquiry placed on their credit reports, and, thereafter, the hard inquiry damaged their credit scores unnecessarily.

FTC also accused Credit Karma of knowing that their “pre-approvals” conveyed false certainty to people based on the results of experiments, a concept also known as A/B testing that shows consumers were more likely to click on offers saying “pre-approved” than those that said they had excellent odds of being approved.

FTC investigators said Karma violated “Section 5 of the Federal Trade Commission Act by falsely representing that consumers were pre-approved for credit offers or had, as mentioned earlier, 90% odds of approval.”

The link below describes each allegation leveled against the company.

FTC Takes Action to Stop Credit Karma From Tricking Consumers With Allegedly False “Pre-Approved” Credit Offers | Federal Trade Commission

Will Pre-approved Inquiries Affect Credit Scores?

The FTC investigation resulted in other accusations as well. Investigators said Credit Karma’s shady tactics caused some credit scores belonging to individuals to suffer damage because pre-approved offers can cause a lender to do a hard inquiry on a person’s credit report.

Pre-approved offers for credit, personal loans, and credit cards are everywhere these days. But the pressing question boils down this way: do pre-approved inquiries affect credit score? Here’s the answer; inquiries for pre-approved offers do not hurt your credit score unless an application is submitted to apply for the special offered credit.

Actually, the fine print that is neatly buried into the pre-approved offer is not always a real pre-approval. Anyone receiving pre-approved offers must fill out an application prior to credit being granted.

The pre-approved process simply means the lender identified a person as a potential candidate for possible credit based on credit report information.

When applications are filled out with an attached pre-approved offer there are two kinds of credit inquiries; a soft inquiry and a hard inquiry.

Hard Inquiries

A hard inquiry is often used by lenders when individuals apply for a credit card or loan such as a mortgage or a car loan. Hard inquiries indicate the person is considering taking on additional debt. Potential lenders can view hard inquiries. The truth of the matter is the undeniable fact that pre-approved offers are typically referred to as a “prescreening” for loaning credit.

Soft Inquiries

A lender conducts a soft inquiry while deciding to pre-approve someone for a credit card etc. Other soft inquiries occur when a credit report is pulled for review or when a debt collector checks a credit report for recent activity.

Difference Between A Hard Inquiry and Soft Inquiry

What’s The Difference Between A Hard And Soft Credit Check? – Forbes Advisor

pre-approved credit. image by profivideos from pixabay
Pre-approved credit. Image by profivideos from Pixabay, edited by NewsBlaze.

How to Opt-out of Pre-Approved Offers

People have a right to change their mind. So if consumers later decline after receiving pre-approved credit card offers, Federal law allows them to opt-out for five years at a time. It is easy to opt-out by calling 888-5-OPT-OUT(888-567-8688) or visiingt Consumers can also opt out of pre-approved insurance offers.

The irony of the situation is that the FTC accused Credit Karma representatives of knowing in advance that consumers were being denied pre-approved credit.

FTC recalls how one complainant put it, “I was declined credit for a pre-approved credit card.”

How could this happen when Credit Karma assured customers they were already pre-approved for credit?

NewsBlaze Senior Business Reporter Clarence Walker can be reached at [email protected]

Clarence Walker
As an analyst and researcher for the PI industry and a business consultant, Clarence Walker is a veteran writer, crime reporter and investigative journalist. He began his writing career with New York-based True Crime Magazines in Houston Texas in 1983, publishing more than 300 feature stories. He wrote for the Houston Chronicle (This Week Neighborhood News and Op-Eds) including freelancing for Houston Forward Times.Working as a paralegal for a reputable law firm, he wrote for National Law Journal, a publication devoted to legal issues and major court decisions. As a journalist writing for internet publishers, Walker's work can be found at American, Gangster Inc., Drug War Chronicle, Drug War101 and Alternet.His latest expansion is to News Break.Six of Walker's crime articles were re-published into a paperback series published by Pinnacle Books. One book titled: Crimes Of The Rich And Famous, edited by Rose Mandelsburg, garnered considerable favorable ratings. Gale Publisher also re-published a story into its paperback series that he wrote about the Mob: Is the Mafia Still a Force in America?Meanwhile this dedicated journalist wrote criminal justice issues and crime pieces for John Walsh's America's Most Wanted Crime Magazine, a companion to Walsh blockbuster AMW show. If not working PI cases and providing business intelligence to business owners, Walker operates a writing service for clients, then serves as a crime historian guest for the Houston-based Channel 11TV show called the "Cold Case Murder Series" hosted by reporter Jeff McShan.At NewsBlaze, Clarence Walker expands his writing abilities to include politics, human interest and world events.Clarence Walker can be reached at: [email protected]