Offers for credit cards can show up as mail, email or even a phone call. If you pay attention you may see that you are “preapproved” or “prequalified.” While these terms are sometimes used interchangeably, there is a distinction. And the difference comes down to who initiates the process.
What Is Prequalification?
Prequalification is typically requested by the consumer. In many cases, the process is done by phone or online survey. The intended cardholder provides basic financial information that includes income, housing costs and additional assets.
After a cursory review of this information, the lender provides a conditional offer based on the information provided. At this point, the consumer is given a general idea of approval and some indication of the products or terms available. The lender may also conduct a soft inquiry at this point with your consent, and make a firm offer of credit if you meet eligibility requirements, similar to the preapproval process.
What Is Preapproval?
In a preapproval, the lender generally initiates the inquiry into a consumer’s fitness for its product. This is where that broad net comes in. Companies usually request a list from one of the three credit reporting bureaus of all individuals that meet specific requirements. These parameters may include a specific credit score, no delinquent payments for 12 months or no bankruptcies in a given geographic region.
Lenders also have the option to provide a list of current customers to the credit reporting agencies to help determine if you may be a good fit for additional products. This information may help explain why you receive offers from financial institutions where you already hold an account.
For lenders to receive a list of consumers that meet their criteria, the lender commits to sending a firm offer of credit. A firm offer is guaranteed to you by the Fair Credit Reporting Act if you meet the guidelines the lender gave to the credit reporting agency. However, your approval is still conditional on a hard credit inquiry to determine whether your credit profile has changed since the firm offer was made.
How Is Your Credit Score Affected?
Preapplication
Both prequalification and preapproval are soft inquiries to your credit report. A soft inquiry will show up only on the consumer facing side of the report and should not affect your credit score.
When You Apply
If you choose to apply for either a prequalified or preapproved offer, the lender does a hard inquiry on your credit. At this point, the lender receives a copy of your current credit profile to ensure your creditworthiness meets the underwriting requirements and has not changed since the time of the soft inquiry.
Typically, a hard inquiry for credit cards only impacts your score by five to 10 points. However, if you apply for multiple credit cards each inquiry will affect your credit score. Preapproval and prequalifications allow you to explore a variety of cards without decreasing your credit score with each application.
Credit Evaluation
If your credit score changes or other eligibility factors shift, the lender can change or retract its credit offer, even with a preapproval. The offer made during a prequalification or preapproval assumes that your credit circumstances remain the same.
Specifically, if your position regarding debt, delinquent payments, bankruptcies or foreclosures reported since the initial soft inquiry changes, the lender is not bound to its offer. The credit terms, amount of credit extended or the product may be changed or revoked entirely. If you report significant changes to your income on the application that information may also impact your offer.
Pros of Preapproved and Prequalified Offers
- Credit card companies may mail unadvertised offers with better terms or welcome bonuses than those publicly available
- You can determine your likelihood of approval before impacting your credit score
Cons of Preapproved and Prequalified Offers
- Offers may tempt you to take on more credit cards than you can handle
- Preapproved mailings can increase the opportunity for identity theft
What To Do if You’re Receiving too Many Offers
Opt Out
If you are being bombarded with offers in the mail or prefer not to receive solicitations, you have the right to opt out. You can choose to opt out of certain mailings for five years through electronic filing or permanently by completing and mailing an additional form.
Opting out means that the credit reporting agencies will not include your name on any list for the selected time frame. Lenders may gain access to your name through other sources and you may still receive credit card offers.
Protect Yourself
Even if you choose to opt out, shred any credit card offers you receive to guard against identity theft. And if your snail mail box is not locked, make sure to check your mail regularly and stop your mail when you are traveling.
Is Prequalification or Preapproval Better?
You may be tempted to think preapproval is preferable to prequalification. Because both require a credit card application and a hard credit inquiry to actually get the credit, neither is necessarily a better option. Even the firm offer status of the preapproval can be undone if your financial circumstances change.
Rather than considering one of these offers superior, view each of them as tools to help you compare your credit options.
Also review the card’s terms and conditions before and after you apply and after you are approved. Determine if the offer changed from the one you were initially provided in the marketing material. Your credit card company will be bound to the terms that come with your specific card, not those listed in the mailer.
Bottom Line
The difference between preapproval and prequalification for your credit cards can be confusing because some credit card companies may use the terms interchangeably. Always carefully review the promotional information you receive and evaluate your credit needs before applying for an offered card. Understanding fair credit offers from these lenders is an integral part in healthy financial management.
