FTC Orders Credit Karma to Halt “Pre-Approved” Offers

For years, the free credit score site Credit Karma has grown in popularity, becoming a default option for many consumers curious about their credit. While the site has remained free to use, one of the ways the company has monetized is by offering credit card referrals to customers, with many of these suggestions being accompanied by a rating of how likely a customer was to be approved based on certain factors. Now, that practice has led to a proposed settlement with the Federal Trade Commission (FTC), with the agency accusing Credit Karma of misleading consumers with these labels.

According to the FTC’s claims, Credit Karma would claim that consumers were “pre-approved” or had “90% odds” to be approved for certain credit card offers. However, in many cases — up to one-third of the time per FTC data — these consumers would then not qualify for the offers. In turn, customers may have damaged their credit by adding a “hard inquiry” to their reports.

The FTC’s report goes on to detail Credit Karma’s decision to use the term “preapproved” after A/B tests showed that customers were more likely to apply for offers labeled with this phrase when compared to those that stated they have “excellent” approval odds. These design choices fall under what the FTC calls “dark patterns.” Also cited in the report is the fact that Credit Karma’s customer service training materials included an FAQ that stated, ““I was declined for a pre-approved credit card offer …. How is that possible?!?!?!”

As part of a settlement with the FTC, Credit Karma has been ordered to stop deceiving consumers’ approval odds for offers. Additionally, the company will pay $3 million to the FTC, with these funds then being distributed to affected customers. Finally, the company must keep records of any market, behavioral, or psychological research, or user, customer, or usability testing, including any A/B or multivariate testing, copy testing, surveys, focus groups, interviews, clickstream analysis, eye or mouse tracking studies, heat maps, or session replays or recordings.”

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

While the bad press that this FTC settlement will bring to Credit Karma is certainly unwelcome, the $3 million fine is unlikely to hurt parent company Intuit too deeply. Still, this could prove to be a “teachable moment” for FinTechs who may be misleading consumers — even if they aren’t exactly intending to. As for Credit Karma, looking at their site, it seems that the company does continue to use labels for approval odds such as “very good,” “excellent,” or “fair.” So, it will be interesting to see if this language continues to evolve and/or the company begins disclosing how accurate their descriptors really are going forward.

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Jonathan Dyer

I'm a small town guy living in Los Angeles looking to make solid financial decisions. I write for a number of finance websites, including HuffingtonPost and Business2Community. I founded DyerNews.com in 2015 to focus on personal finance and the emerging FinTech markets.

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