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Credit Karma to Pay $3 Million to the FTC

Popular Credit Website Used Deceptive Practices That Harmed Consumers’ FICO Scores

Disclosure: This post may contain affiliate links.

Recently, the US Federal Trade Commission issued a press release explaining that they took action against Credit Karma. They found that the company had been violating a key part of the Federal Trade Commission Act.

The popular consumer finance website was found to have used deceptive practices that tricked consumers into applying for “pre-approved” credit offers. However — despite “pre-approval” — many applicants were rejected anyway.

Who is Credit Karma?

Credit Karma is a popular personal finance company that focuses on consumer credit. They offer consumers “free” credit monitoring tools in exchange for personal information.

Credit Karma doesn’t make money that way though. In reality, they make their money by referring consumers to their lending partners.

For every consumer that applies and is accepted for a credit card or loan, that’s money in Credit Karma’s pocket.

What is a Pre-Approval?

I’ve talked about mortgage pre-approvals before, but credit and loan pre-approvals are actually quite similar.

A “pre-approval” — no matter what type of lending it’s being used for — is a prescreening method used to determine if a person might be approved for a loan or credit card.

A pre-approval doesn’t mean that you’re certain to be approved for a loan or credit card; you can still be rejected.

You are only “approved” once a lender actually approves your application.

FTC Complaints

The reason the FTC has focused in on Credit Karma in particular is because the agency received numerous complaints from consumers themselves.

At first, I’m sure it appeared that consumers didn’t understand that a pre-approval was not a surefire thing.

However, after a lengthy investigation the FTC was able to allege, “that the company used claims that consumers were ‘pre-approved’ and had ‘90% odds’ to entice them to apply for offers that, in many instances, they ultimately did not qualify for.”

It seems to reason that the FTC found that significantly more than 10% of Credit Karma users were rejected from pre-approved offers. This makes their claim of 90% approval odds a complete lie — and that’s when the FTC has the power to step in.

Harming Credit Scores

The thing is, Credit Karma didn’t only lie to consumers. They actually inflicted harm on them too — financially speaking.

When applying for new loans and credit cards, consumers are hit with a “hard pull” on their credit report. A side effect of this hard pull is that credit scores (FICO scores) significantly decrease.

A hard pull on a credit report can keep scores low for six months or more, and the hard pull itself stays on the record for up to two years.

All of this makes it harder for consumers to try to get another loan or line of credit when they need it; if they do get a loan, it’s usually at a much higher interest rate than they would have originally qualified for.

FTC Enforcement Actions

As a result of the FTC’s enforcement, Credit Karma must immediately stop misleading consumers.

Credit Karma must also pay a $3 million fine directly to the FTC. This money will then be distributed to the consumers that were affected by the company’s deceptive practices.

Finally, the FTC has ordered Credit Karma to keep pristine records on any and all personal consumer data, as well as consumer behavioral data used for marketing purposes.

Conclusion

Quite frankly, I’m not surprised that Credit Karma did this. From what I can tell, they were clearly violating FTC law on deceptive practices.

However, a $3 million fine seems like a slap on the wrist. I wouldn’t be surprised at all if we see similar practices from them in the future, or even from their competitors.

There is a lot of money to be made in referral fees, and companies will find the easiest ways possible to to get more consumers to sign up for these offers — even by means of deception.

Anyway, what do you think? Do you think that the FTC was thorough enough in their enforcement? Can we ever really trust Credit Karma again?

I guess we will just have to wait and see.

References:

Anonymous. (2022, September 1). FTC takes action to stop credit karma from tricking consumers with allegedly false "pre-approved" credit offers. Federal Trade Commission: Protecting America's Consumers. Retrieved September 14, 2022, from https://www.ftc.gov/news-events/news/press-releases/2022/09/ftc-takes-action-stop-credit-karma-tricking-consumers-allegedly-false-pre-approved-credit-offers

Jones, D. (2022, September 6). Credit karma will pay $3 million to users targeted with false preapproved offers. NPR. Retrieved September 14, 2022, from https://www.npr.org/2022/09/06/1121246081/credit-karma-false-ftc-preapproved-credit-card

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Disclosure: This post may contain affiliate links.

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This article was originally published on OhHeyItsRay.com

Oh Hey, It’s Ray is a real estate investor, entrepreneur, and former real estate agent. She lives happily with her husband and two children in the Pacific Northwest. See more from Ray at her YouTube channel and on Ohheyitsray.com