Credit Sesame on why you may want to hang on to that pre-approval for a credit card.
You may be tempted to throw away a pre-approval letter from a credit card company. It’s just another kind of junk mail, you may think.
Or it could be a credit card with the best perks on the planet, or at least a card you that may help your financial situation in an emergency. You might think that the offer must be for a credit card you qualify for. Why else would the credit card provider offer it to you?
However, pre-approval for a credit card is no guarantee of getting the credit card on offer.
What is pre-approval for a credit card?
Pre-approval for a credit card is sometimes used interchangeably with “pre-qualification” in credit card or loan offers, but there are a few differences. Either way, a creditor has done an initial assessment that means you are more likely to be approved for its product.
Based on the assessment you are offered potential interest rates and terms in a pre-qualification offer. Less rigorous assessments are done for pre-qualification, and it can be less accurate than the next step.
That next step is pre-approval, which requires that you provide more personal and financial information to the creditor. If your information checks out and you have the credit score, income and other data required, then you may receive a credit card offer.
If you are prequalified, some companies may ask you to submit official documents, such as proof of your monthly housing payment and savings. Lenders may also check your credit through a soft inquiry, which doesn’t affect your credit score.
A soft inquiry may be done during the prescreening process. Lenders can make soft inquiries without consumers’ permission as a way to check credit and determine who qualifies. The inquiries are visible to consumers on their credit reports, but don’t affect scores.
The complete review process may lead to the creditor asking your permission to conduct a hard credit inquiry, which can impact your credit scores.
None of this guarantees approval for the credit card.
Benefits of pre-approved credit
Credit card pre-approval is usually given to consumers with good credit. They are the customers lenders want because they have a history of paying their bills on time and managing their credit. A credit reporting agency may have your name on a list of people who meet a creditor’s criteria, such as having good credit, and this is why you are being offered a new credit card.
As a low-risk client you are likely to be offered better interest rates and may be swamped with credit card offers. If you have been struggling to improve your credit score, a pre-approval offer can be the first sign that you’ve reached your goal.
New credit can help build your credit score more, accounting for 10% of a credit score. But don’t open several credit accounts at the same time. This can be seen as a high risk because you’re desperate for credit.
A new credit card can affect the amounts owed, which makes up 30% of a credit score. It increases your credit limit and improves your credit utilization rate, which can help raise your credit score. Adding a new credit card increases your overall credit limit, and if it isn’t used too much, your credit utilization rate will drop. Using more than 30% of your available credit is negative to creditors.
A more enjoyable benefit of a pre-approved credit card is the potential to earn rewards through spending. Airline miles, hotel rooms, and cash are among the benefits some cards offer. New users can sometimes get a cashback bonus, such as $200 or so, for spending $1,000 or so in the first three months of opening a card.
Downsides of pre-approval
Don’t let the flattery of pre-approval for a credit card get to your head. If you haven’t handled new credit well in the past and have forgotten to make payments and have gotten into debt, then a new credit card may not be a good idea.
Here are some potential downsides to getting a new credit card that you’ve been pre-approved for:
- You could spend more by having a new credit card, leading to long-term debt.
- Credit card interest rates can rise if the bill isn’t paid on time.
- Revolving credit can mean monthly payments for years, affecting your budget.
- Just making the minimum monthly payment on a credit card balance can require years to pay off the balance, and a high amount of interest.
- An annual fee is common for cards with perks, so make sure the perks are worth the cost.
When you might want to accept a pre-approved credit card
Since credit card pre-approval can mean being approved for a credit card at anytime during the review process, you should only apply for cards that you’re sure you want. Once you’ve completed the application, the issuer must offer you the benefits and terms in the pre-approval notice.
The pre-approval should include an interest rate range. The better credit score you have, the lower the rate should be if you’re approved for the card. You may not know the exact rate you’ll get until later in the process, and you can decline the card if you want to.
If you can get a lower interest rate than what you have on a credit card now, then the offer might be enticing. After getting a lower interest rate, here are some other factors that may sway you to apply for a pre-approved card:
- You’re looking to rebuild your credit and the new credit card (and its low interest rate) may help you do that.
- You don’t plan to use the card much and expect to pay off the balance each month as a way to build credit.
- Credit card companies may be competing for your business, so if you get multiple pre-approvals, you may see competitive terms and rates.
- A 0% introductory APR card for six months or longer can be a good way to pay off high-interest accounts you have already.
- You really want that free airline ticket or other outstanding perk in the credit card offer to new users, making the annual fee worthwhile.
The last word
Pre-approval for a credit card is not a guarantee of getting the shiny, new credit card with the bonus miles that you want, but it’s a good start.
New credit shouldn’t be taken lightly, as it can affect your credit score and ability to borrow in the future. Use it well, and lower interest rates and better loan terms may be offered to you in the future. Use a new credit card too much and don’t pay it off each month, and, well, you know how that works.
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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.
