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Pre-approved Credit Card Applications are a Win-Win

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Credit Sesame on why pre-approved credit card applications are a win-win for consumers and credit card companies.

Credit card offers fill your mailbox, flood your email inbox and interrupt your television shows. When consumers are bombarded with pitches to that degree, is it any wonder they get a little jaded?

Should you care when a credit card company says you’re pre-approved for a card? Is it just a gimmick, or too good to be true?

It is worth paying attention to pre-approved card offers is because they represent a win-win for card issuers and consumers.

How pre-approved credit cards work

Pre-approved credit card offers are based on financial information about you that the card company can get without having to ask you anything.

This may include soft inquiries of credit status. These do not require your permission and do not affect your credit score.

If you have a business relationship with the card issuer, bank or other financial institution already, they may also make the offer based on knowledge gleaned from other accounts you have with them. This may involve your past history of making on-time payments and your income and wealth.

After reviewing the information they have, the card issuer may believe you are eligible for one of their card offers. This does not guarantee approval. That may require additional information from you or authorization to do a full credit check. However, the odds are in your favor.

Pre-approval vs. pre-qualification

Pre-approval is similar to pre-qualification. With credit cards, pre-approval generally means the card issuer has screened you before making the offer. Pre-qualification is generally a process consumers can go through when they inquire online about a card. This is usually a simple matter of providing some information about themselves to see the offers they may qualify for.

Neither pre-approval nor pre-qualification is a guarantee of final approval.

This is different from mortgage lending, where pre-approval does represent a commitment on the part of the lender. However, even without a firm commitment credit card pre-approval has value. It can help you narrow your card shopping down to choices that are more likely to be available to you.

Focusing your card search can help you, but what’s in it for the card company? Card companies like using pre-approved applicants because they represent a lower risk. This makes pre-approved offers a win-win for consumers and credit card companies.

Pre-approved credit card applications are more efficient

Processing customer applications is costly for credit card companies. It involves compiling and sorting data and doing credit checks. This takes time and effort. When the customer is approved for a credit card the card issuer gets a new customer and a profitable relationship.

If the application is turned down, the card issuer has nothing to show for the work that went into processing the application. So, it is in the best interests of the card company to identify applicants who are likely to be approved. Hence the term, “pre-approved.”

Credit cards offered are likely to be more suitable

Credit card companies tailor the terms of their products to different types of customers. The fees, interest rates and rewards of a card are based on credit characteristics of applicants and how they are likely to use their cards.

A mismatch between the card terms and the type of customer may prove to be unprofitable for the card company. It’s in the card company’s interest to use pre-approval technology to try to match consumers with the right type of card.

Pre-approval minimizes harmful hard inquiries

Lenders want consumers to succeed. Credit card companies make money if customers can keep up with their bills. They lose money when consumers default.

More generally, credit card companies are interested in promoting good credit. More people with good credit scores means a wider pool of low-risk customers.

Applying for a credit card often involves a hard credit check which affects a consumer’s credit score. Credit card companies have no interest in wasting time on unsuccessful applications. This benefits consumers because a hard inquiry can hurt your credit score.

Matching consumers with products that suit them ensures cards are issued to customers who use their credit cards successfully. For the card company, that can make the difference between a short, unprofitable relationship and a long profitable one. It also keeps credit scores higher, generally, sustaining a healthy market for credit card issuers.

You may end up with more choice of credit cards

As a consumer, it’s nice to be wanted. Being considered an attractive potential customer increases the choices available to you, and helps you qualify for better terms. If you receive pre-approved offers, pay attention to them but don’t jump at the first one. If you qualify for one company’s credit card, you probably qualify for similar cards from other issuers.

When you receive a pre-approved offer, take it as a cue to check out similar cards from other companies. Even if you haven’t received pre-approved offers from those other companies, chances are you can use online tools to see which cards you qualify for.

Just as card companies try to be selective about their customers, you should be selective about which credit cards you choose. Use a combination of pre-approval and pre-qualification to identify potential candidates.

Line up all the credit card terms on offer. Consider fees, interest rates and rewards in the context of how you may se the card.

Then you can choose the best one, knowing that you have a good chance of being approved for it. This saves you from wasted applications and starts you and the credit card company on the path toward a win-win relationship.

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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.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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