By Andrew Keshner
Credit Karma has reached a $3 million settlement with the Federal Trade Commission after allegedly misleading users shopping for credit cards by informing them about “pre-approved” offers that later resulted in rejection.
Though Credit Karma users heard language like “pre-approved” and “90% odds” in emailed notices about offers from third-party card issuers, it didn’t always pan out that way.
In many “pre-approved” offers, it ended with nearly one-third of consumers getting turned down once the issuer proceeded with the underwriting review process, the federal regulator said.
Though Credit Karma flagged the possible chances of rejection in the notices, that wording allegedly didn’t appear as prominently as the company’s notices about pre-approval, the FTC said.
Credit Karma’s internal testing studied the “click rates” with pre-approval language and a training manual told customer service representatives how to handle the complaints of empty-handed users, the FTC’s complaint noted.
The $3 million fine is meant for consumers who unsuccessfully jumped at the offers. The regulators’ action takes aim at a time frame stretching from February 2018 through April 2021, its complaint said.
“Credit Karma’s false claims of ‘pre-approval’ cost consumers time and subjected them to unnecessary credit checks,” Samuel Levine, the FTC’s Bureau of Consumer Protection director, said in a statement with the agreement announced Sept. 1.
What’s more, the company said the FTC’s allegations only focused on a sliver of credit-card and loan offers from banks and financial institutions that were available on the site’s platform before April 2021.
“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, Credit Karma’s chief legal officer.
By the end of August, the average rate on a new card offer was 17.96%, according to Bankrate.com. That surpasses a recent pre-pandemic APR high of 17.87% and is approaching the 18.12% average APR last seen in January 1996, researchers said.
Credit Karma, which also lets users shop for mortgages, car loans and understand their credit score, said that it only gets paid when card lenders and issuers proceed with a loan or offer for its users. The regulator isn’t challenging the approval language that Credit Karma now uses, the company added.
The FTC allegations focus on a period before the Federal Reserve’s recent interest-rate hikes, but experts say it’s a cautionary tale about the importance of fine print when shopping for a credit card.
As the Fed raises its key interest rate in order to fight inflation gnawing at household budgets, the average percentage rates (APRs) on credit cards are also increasing.