Credit Karma Told to Halt ‘Pre-Approved’ Credit Card Offers

The free site settles an FTC suit for $3 million but disputes claims that the offers were deceptive

By Octavio Blanco

Credit Karma, a free personal-credit monitoring site, made deceptive “pre-approved” credit card offers to clients who ended up getting rejected and saw their credit score drop, according to a lawsuit filed by the Federal Trade Commission (FTC).

Credit Karma, which settled the suit but disputes the FTC’s allegations, agreed to pay $3 million to people who allegedly wasted time applying for credit that they weren’t actually pre-approved for.

The FTC alleges that from February 2018 to April 2021, the company told consumers they had “90% odds” to be approved to entice them to apply for credit card offers.

“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. “The FTC will continue its crackdown on digital dark patterns that harm consumers and pollute online commerce.”

The term “dark patterns” broadly encompasses all kinds of manipulative practices on the internet that push people toward actions they might not take otherwise. These traps may be deliberate, or just a consequence of poor design. But the result is that people end up paying more than they should for a service, agree to excessive data collection, or just give up valuable extra time and attention.

To use Credit Karma’s services, the FTC says, clients must provide the company a variety of personal information, allowing Credit Karma to amass over 2,500 data points on each individual, including credit and income information. Credit Karma uses that information to send targeted advertisements and recommendations for financial products, like credit cards, the FTC says.

Credit Karma was also ordered to preserve records related to its data monitoring and collection practices. These include market, behavioral, or psychological research; eye or mouse tracking studies; and usability testing, such as A/B or multivariate testing, in which digital consumers are shown different text to gauge which is the most successful in causing them to click on the pertinent information.

Credit Karma, which is owned by the digital financial products giant Intuit, boasts that it has 120 million clients throughout the U.S., the United Kingdom, and Canada, and says its “members” include “almost half of all U.S. millennials.”

While best known for its free credit score monitoring tools, the company offers many other free financial tools, including identity monitoring, applying for credit cards, shopping for loans (car, home, and personal), and auto insurance, as well as savings and checking accounts through its FDIC member bank partner, MVB Bank.

The company says it rejects the FTC’s accusation and agreed to settle the case only in order to continue doing business without disruption.

“We fundamentally disagree with the FTC’s allegations about marketing terms that aren’t even in use anymore, but ultimately we reached this agreement to avoid disruption to our mission and maintain our focus on helping our members find the financial products that are right for them,” said Susannah Wright, chief legal officer at Credit Karma. “Our industry-leading technology provides the transparency our members need to shop for financial products with more confidence,” she said.

In a press release, the company went on to say that banks and financial institutions use massive amounts of data and machine learning models to approve or deny people for financial products. However, it says that because the industry lacks the appropriate transparency, “it’s nearly impossible for the average American to have any indication of whether they are likely to be approved for financial products.” That can lead people to apply for products where they are likely to be denied, it said.

Though the best way to avoid issues such as those associated with this case is to have a good understanding of the information contained in your credit report and your FICO score, credit can be confusing for consumers. For one, the credit industry is opaque.

There are dozens of credit scores—many of which consumers don’t know about. And when consumers take steps to get clear on where they stand, often the information held by the credit agencies is incorrect. In fact, more than a third of volunteers in a Consumer Reports study say they found errors in their credit reports.

9 Ways to Raise Your Credit Score

Taking these actions can help to raise a sagging score. Just don’t expect it to happen overnight: Depending on the reasons for a poor score, it could take from 12 to 24 months to see a difference.

1. Regularly monitor your credit reports. Mistakes on your credit reports can be costly—and common. A study by the Federal Trade Commission found that 1 in 5 consumers had an error on his or her credit report that was corrected after it was disputed. Consumers are entitled to receive three free credit reports each year—one from each of the three major credit reporting agencies: Equifax, Experian, and TransUnion. A smart way to monitor your credit is to go to annualcreditreport.com and request a free report from a different agency every four months. Common errors to look for include: credit accounts that aren’t reflected, duplicate credit accounts, debts incurred by a former spouse, and bad debts older than seven years. You can initiate a dispute online at each of the three major credit reporting agencies.

2. Pay your bills on time. Approximately 35 percent of the FICO score is determined by your payment history, and 96 percent of those with the highest FICO scores have no missed payments. It’s better to pay the minimum on credit cards each month than to fall behind.

3. Don’t apply for several credit cards at once. This generates numerous inquiries into your credit history, which may lower your score. Another reason: Opening several new credit accounts at the same time reduces the average “age” of your accounts, which can also lower your credit score. However, multiple requests within a 45-day period for a single type of credit (mortgage, auto loan, or student loan, for instance) are counted as a single inquiry to allow consumers to shop around for the best rate. These are less likely to lower your score.

4. Don’t cancel unused cards (unless they carry an annual fee). Roughly a third of your score is based on the ratio of credit used to total available credit. Eliminating a card will lower your available credit and can work against you.

5. Keep credit balances low. Because a high credit ratio can negatively affect your score, maintaining a low revolving credit balance is wise. (Most people with the highest FICO scores owe less than $3,000 on revolving accounts.)

6. If you charge everything on a rewards card for the points, switch to cash or a debit card for a couple of months before applying for new credit. Even if you pay your balances in full every month, a lot of debt relative to your credit limit can still be viewed negatively.

7. Maintain a variety of credit types. Successfully paying, say, an auto loan, a student loan, and credit card bills over the same period shows that you’re able to juggle different types of credit. That diversification accounts for 10 per­cent of your score.

8. Pay off debt in collection. With the most current version of the FICO score, debt that was referred to a collection agency but has been paid off will no longer count against you. (Always dispute any debt that has been wrongly assigned to you.)

9. Get a secured credit card after bankruptcy. If you’ve been through bankruptcy, using a secured credit card backed by a refundable deposit may be an effective way to start rebuilding your credit. A bankruptcy will have less impact on your score over time if you don’t default on new loans. It may be a while before you can access credit inexpensively again: Chapter 7 and Chapter 13 bankruptcies stay on your credit report for up to 10 years.



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