The Federal Trade Commission said On Thursday, he would fine Credit Karma $3 million because, according to the commission, the personal finance company told consumers they were pre-approved for credit card products when they didn’t. were not.
Credit Karma also falsely told consumers they had a 90% chance of approval, according to the FTC. In contrast, nearly a third of consumers who requested supposedly pre-approved offers were turned down. To add insult to injury, many of these applicants then suffered a major blow to their credit scores.
According a proposal for an agreement between the FTC and Credit Karma, the company has neither admitted nor denied any of the allegations. Credit Karma also said it could not verify “the numbers cited in the FTC complaint” and that fewer than 1,500 people have ever contacted the company about anything related to the allegations.
After the proposed deal was released, Susannah Wright, Credit Karma’s chief legal officer, denied the allegations in A press release. “We fundamentally disagree with the FTC’s allegations,” she said, and ultimately reached an agreement to “avoid disrupting our mission.” She added that the company no longer uses the marketing terms cited in the FTC complaint.
At press time, Credit Karma still advertises in its iPhone app to select consumers that they have a 90% chance of receiving approval for certain credit cards. The FTC said Credit Karma advertised fake pre-approvals from February 2018 to April 2021.
One of the card issuers whose Credit Karma products advertised told the FTC, “The Company does not approve, pre-qualify, or pre-screen consumers to whom to offer the [Company’s credit card] via Credit Karma,” according to the commission’s complaint. The FTC did not name the card issuer.
A Credit Karma spokeswoman said the company “uses machine learning to surface our partners’ financial products on our platform,” which she says helps consumers find financial products they want. they are likely to be approved. The spokesperson also said the models use “anonymized and privacy-protected data points” about Credit Karma users to target ads.
The FTC said Credit Karma designed the pre-approval ads using “dark patterns” to trick consumers into clicking on credit card app ads. For example, Credit Karma found through testing that showing consumers a pre-approval claim resulted in higher click-through rates compared to telling consumers they had “great” chances of approval even though, according to the FTC, the pre-approval claims conveyed “false certainty.”
According to the FTC’s account, Credit Karma has strayed from regulations that financial institutions must follow when generating and advertising pre-approvals for credit products, according to Stewart Watterson, a strategic analyst for the consulting firm. Aite-Novarica, who previously served as senior vice president. President and Group Head of Corporate Credit Cards for PNC Bank.
The FTC said in its complaint that Credit Karma’s training materials stated, “I was declined a pre-approved credit card offer…How is that possible?!?!?!” and confusion about pre-approval as common issues that customer service representatives should expect. Watterson said it shows Credit Karma knew it was providing pre-approvals that turned into denied requests.
Companies that follow pre-approval regulations can sometimes extend pre-approvals to people who are ultimately denied credit. However, a high percentage – Watterson did not specify how much – of consumers who receive pre-approval and then apply must receive final approval or the card issuer could violate regulations governing pre-approvals. .
Watterson said Credit Karma may have been aware of the rules financial institutions must follow when sending out pre-approvals, but he might have believed those rules didn’t apply to the company, which doesn’t is not regulated as a card issuer.
Credit card companies generate pre-approvals by purchasing lists of consumer names and addresses from credit bureaus. The card issuer sets the criteria for the consumers it seeks to reach – for example, consumers who live in a certain geographic area and have a credit score within a certain range – and the credit bureau provides the card issuer a list of consumers who meet these criteria.
According to Watterson, not only does the card issuer have to follow certain laws when making final credit approvals, they also have to follow those laws when getting the list of people they’re making pre-approval offers to.
In other words, the process is regulated from start to finish, and financial institutions that stay online throughout the process need not fear fines like the one the FTC imposed on Credit Karma. Financial institutions that offer credit products and pre-approvals to customers don’t have to worry about being next, Watterson says, as long as they stick to those rules.
“It’s not the FTC doing the crackdowns because everyone else strayed from the law,” Watterson said. “Those guys weren’t near the line.”