INDIANAPOLIS — The Federal Trade Commission is taking action against Credit Karma for allegedly deceiving people seeking credit cards or loans.

The FTC says many people who got “pre-approved” credit offers from Credit Karma weren’t approved for credit. As a result, they wasted time applying and saw their credit scores drop when their applications were denied.

The lawsuit alleges the company falsely told many consumers that they had been “pre-approved” for credit offers. The FTC said Credit Karma knew that its purported “pre-approvals” conveyed false “certainty” to consumers.

The FTC said the company conducted experiments, also known as A/B testing, showing that consumers were more likely to click on offers saying “preapproved” than those saying they had “excellent” odds of being approved. The commission says these types of design tricks have been described as “dark patterns.”

“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 complaint alleges that Credit Karma’s conduct harmed consumers by: 

  • Deceiving them about whether they were approved: The FTC said despite Credit Karma’s claims that consumers were “pre-approved,” for many offers, almost a third of consumers who applied were in fact denied. Credit Karma was aware that its consumers were misled: for example, its own customer service training materials cited “I was declined for a pre-approved credit card offer …. How is that possible?!?!?!” as a common issue representatives would encounter.
  • Costing consumers time and harming their credit score: The complaint alleges that numerous consumers wasted significant time applying for credit card offers. Additionally, when consumers applied for these offers, third-party financial companies made a “hard inquiry” on their credit reports, which in many instances lowered consumers’ credit scores and harmed their ability to secure other financial products in the future.

Under a settlement, Credit Karma will pay $3 million to reimburse people who responded to its allegedly deceptive offers but were ultimately denied credit. The FTC says the order also prohibits Credit Karma from making misleading claims that people have been or are likely to be approved for credit or loans.

Credit Karma responded to the settlement, saying it “fundamentally disagrees” with the allegations.

“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. Our industry-leading technology provides the transparency our members need to shop for financial products with more confidence.”

Susannah Wright, Chief Legal Officer at Credit Karma

The company says the agreement is consistent with how Credit Karma already runs its business, and they only get paid when members are approved for credit cards and loans.