The world of consumer credit is loaded with myths, some more stubborn to debunk than others. Credit scores are used by employers, you build credit faster by carrying credit card balances, credit scores reward you for being in debt, opting out will improve your credit scores. None of these things are actually true and it’s the last myth that I’ll address today.
What is opting out?
Today when you get home from work or school and check your mail you’ll likely find one or more credit card offers from credit card issuers. Those offers are likely of the “preapproved” variety, which means the credit card issuer has actually determined that they are willing to offer you a credit card even though you never asked for one.
The credit card issuer purchased your name, along with many others, from one of the credit reporting agencies through a process called “prescreening.” Prescreening is the process whereby the card issuer gives the credit bureau a list of criteria and wants a list of consumer names and addresses that meet that criteria.
So, for example, I might ask one of the credit bureaus to provide me with list of 1,000,000 names and addresses belonging to consumers who live in the metro Atlanta area who have VantageScore credit scores above 725, don’t have any late payments in the past 24 months, and don’t have more than $10,000 of credit card debt. This is called “selection criteria.” Of course, the credit bureaus have to tap into their credit file database in order determine who meets this criteria.
If the credit card issuer acquires your name and address using this method then they have to make you what’s referred to as a “firm offer of credit or insurance.” This is normally done by sending you a credit card offer in the mail saying that you’ve been pre-approved for some amount of credit. All of this will result in a “promotional” inquiry being posted on your credit report card.
The Fair Credit Reporting Act gives consumers the ability to prevent the credit bureaus from selling their names to lenders through a process called “Opting Out.” You can do this for free at www.optoutprescreen.com. You can opt out forever or for a shorter amount of time. After a few months you’ll stop getting preapproved credit card offers in the mail.
The opting out myth
Some people suggest that you will improve your credit scores by opting out. The problem is that it’s not true. Opting out has no impact, at all, on your credit scores.
The only direct influence opting out has on your credit reports is to prevent new promotional inquiries from being added. But, promotional inquiries are of the “soft” variety and they have no impact on your credit scores anyway so preventing them doesn’t do anything for your scores.
Advantages to opting out
That certainly doesn’t mean there’s no value to opting out. You’ll certainly reduce or fully eliminate credit card offers, which means less mail to throw away or shred. And, because those credit card offers can be used by credit card fraudsters to open new cards in your name opting out can help to minimize your risk of credit card identity theft. But, that’s where the value ends.
