[BUG] official VS Code extension does not work due to API error

Preflight Checklist

• [x] I have searched existing issues and this hasn't been reported yet
• [x] This is a single bug report (please file separate reports for different bugs)
• [x] I am using the latest version of Claude Code

What's Wrong?

When I try to use (type a prompt) in VS Code extenstion, I get the following error:

API Error: 400 {"type":"error","error":{"type":"invalid_request_error","message":"Third-party apps now draw from your extra usage, not your plan limits. We've added a $20 credit to get you started. Claim it at claude.ai/settings/usage and keep going."},"request_id":"/request_id/"}

I'm using official vs code extension: https://marketplace.visualstudio.com/items?itemName=anthropic.claude-code

What Should Happen?

I should be able to use the Claude Code (with Pro plan) with native VS Code extension. It shouldn't been treated as 3rd party.

Error Messages/Logs

API Error: 400 {"type":"error","error":{"type":"invalid_request_error","message":"Third-party apps now draw from your extra usage, not your plan limits. We've added a $20 credit to get you started. Claim it at claude.ai/settings/usage and keep going."},"request_id":"/request_id/"}

Steps to Reproduce

Having win 11

• Open VS code
• install the extension: https://marketplace.visualstudio.com/items?itemName=anthropic.claude-code
• login into your pro subscription
• try prompting

results in error

Claude Model

Sonnet (default)

Is this a regression?

Yes, this worked in a previous version

Last Working Version

_No response_

Claude Code Version

2.1.96

Platform

Anthropic API

Operating System

Windows

Terminal/Shell

Other

Additional Information

fyi using Claude via powershell terminal, or integrated VS code terminal works; what's not working is the official VS Code extension