Have you ever been turned down for a credit card that Credit Karma claimed you were pre-approved for? If so, you’re far from the only one.
Credit Karma is in legal trouble because it was pushing supposedly “pre-approved” credit cards on customers who then got rejected by credit card companies, hurting their credit scores, according to the Federal Trade Commission. The FTC is ordering the popular credit monitoring service to pay $3 million to customers who were affected.
“Credit Karma’s false claims of ‘pre-approval’ cost consumers time and subjected them to unnecessary credit checks,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection.
Nearly one-third of the people who applied for credit cards that were labeled as “pre-approved” were subsequently denied following a credit check.
The FTC alleges that, from February 2018 to April 2021, Credit Karma falsely told many consumers that they had been “pre-approved” for certain credit cards, or that they had “90% odds” of qualifying for the cards. That enticed users to apply for credit card offers that they ultimately didn’t qualify for. This had a negative impact on their credit scores, the FTC said.
The agency’s order requires Credit Karma to pay $3 million that will be sent to consumers who wasted time applying for these credit cards. It also orders the company to stop making these kinds of deceptive claims. The FTC hasn’t said how those consumers will be identified.
In response, Credit Karma said, “We fundamentally disagree with the FTC’s allegations about marketing terms that aren’t even in use anymore,” but that it reached an agreement with the FTC so it can get back to helping customers.
“The FTC’s allegations are focused on Credit Karma’s historical use of the term ‘pre-approved’ for a small subset of the credit card and personal loan offers available on Credit Karma’s platform prior to April 2021, and do not challenge the approval odds language Credit Karma has provided to its members since April 2021,” the company said.
Credit monitoring companies like Credit Karma and its main competitor, Credit Sesame, provide tools that allow consumers to monitor their own credit scores and credit reports.
To use Credit Karma’s services, consumers must provide it with some personal information, allowing Credit Karma to amass over 2,500 data points on each consumer, including credit and income information, the FTC said. Credit Karma uses that information to send targeted advertisements and recommendations for financial products, like credit cards.
According to the FTC, Credit Karma knew that its purported “pre-approvals” conveyed false “certainty” to consumers, based on the results of experiments, also known as A/B testing, showing that consumers were more likely to click on offers saying “preapproved” than those saying they had “excellent” odds of being approved.
So, are you interested in a premium credit card? The kind that gets you airline points and cash back on purchases?
Ultimately, your best bet for qualifying for one is to have a good credit score. A good tool for improving your score is to use a credit monitoring tool like Credit Sesame — or Credit Karma. But ultimately, the most important thing you can do for your credit score is to pay your bills on time.
Mike Brassfield is a senior writer at The Penny Hoarder.