Credit card preapproval vs. prequalification: What they mean and how they impact your credit score

Have you ever received a credit card offer in the mail claiming that you’re “prequalified” or “preapproved”? While these terms might sound familiar, they can mean different things for your chances of getting approved for a card. Let’s break down what these offers mean, how they could impact your credit score, and how to use them to your advantage.

What is credit card prequalification?

When a credit card company says you’re prequalified, they’ve done some initial homework on your creditworthiness. Here’s what you need to know:

• The issuer asked a credit bureau for a list of people meeting specific criteria, such as a certain credit score range.
• You can also prequalify through a card issuer’s website before formally applying for a card.
• Prequalification results in a soft inquiry on your credit report, which won’t affect your credit score.

But remember, prequalification doesn’t guarantee approval. If your financial situation changes after the initial screening, it could affect your eligibility.

The prequalification process

Let’s dive a little deeper into the prequalification process:

1. Initial screening: Credit card companies work with credit bureaus to identify potential customers who meet their basic criteria. This could include factors like credit score range, income level, and credit history length.
2. Soft pull: The issuer performs a soft inquiry on your credit report. This gives them a high-level overview of your creditworthiness without affecting your credit score.
3. Offer: If you meet their criteria, the issuer may send you a prequalification offer. This could come via mail, email, or even a pop-up when you’re browsing their website.
4. Your response: If you’re interested in the offer, you’ll need to respond by filling out a formal application. This is when the real evaluation begins. The issuer will examine your credit report, which is known as a hard inquiry. A hard inquiry can cause a temporary dip in your credit score.

What is credit card preapproval?

Preapproval takes things a step further. When you’re preapproved, the credit card company has reviewed your credit report more closely. Based on this review, they believe you meet the card’s criteria, but you’ll still need to apply formally, and the issuer will take a deeper look at your credit report.

Nate Beacon, head of consumer and small business credit cards at PNC Bank, explains, “Preapproval has the benefit of giving the consumer a better idea of whether they qualify or not, so it can save them time and effort. However, it isn’t a guaranteed approval.”

Like prequalification, preapproval usually results in a soft inquiry on your credit report.

The preapproval process

Here’s a closer look at how preapproval typically works:

1. Detailed screening: The issuer conducts a more thorough review of your credit profile. This might include a closer look at your credit score, payment history, and current credit utilization.
2. Tailored offer: Based on this review, the issuer creates an offer tailored to your credit profile. This might include specifics like a potential credit limit or interest rate range.
3. Firm offer of credit: Under the Fair Credit Reporting Act, if an issuer preapproves you based on information in your credit report, they must make you a “firm offer of credit.” This means the issuer must honor the offers they provided when you apply, provided you still meet the criteria they used to send the offer.
4. Your response: If you decide to move forward, you’ll need to complete a formal application. The issuer will then conduct a hard inquiry on your credit report for final approval.

Key differences between prequalification and preapproval

While some lenders use these terms interchangeably, there are some general distinctions. Read the promotional offer carefully before applying.

Impact on your credit score

The good news is that neither prequalification nor preapproval affects your credit score. However, if you decide to apply for the card, that’s when things change.

Josh Berwitz, Ascenda's chief commercial officer, notes that the credit profile that companies look for “varies dramatically across financial institutions and within them based on the range of products they offer.”

Here’s what happens when you apply:

1. The issuer performs a hard inquiry on your credit report.
2. This hard inquiry can temporarily lower your credit score by a few points.
3. Multiple applications in a short period can have a more significant impact.

Phillip Parker, an expert at CardPaymentOptions.com, explains it this way: “A hard inquiry means you’ve applied for some type of credit. A soft inquiry says, ‘We’re just checking out this person; they’re not applying for anything.’”

Understanding hard inquiries

It’s important to know how hard inquiries affect your credit score:

• A single hard inquiry typically drops your score by less than five points.
• The impact diminishes over time, and hard inquiries only stay on your credit report for two years.
• Multiple inquiries in a short period can have a compounding effect, potentially signaling financial distress to lenders.

If your credit score has taken a hit recently because you recently applied for a card, missed a payment, or some other reason, consider waiting to apply until you’ve improved it.

Should you accept every offer?

While credit card offers are tempting, it’s wise to be intentional about which ones you pursue. Look for cards that align with your spending habits and needs. Here’s why:

1. Too many applications in a short time can hurt your credit score.
2. New accounts lower the average age of your credit history, which also impacts your score.
3. Having too many credit cards might negatively impact future loan applications, such as mortgages.

Parker advises, “Avoid the temptation to switch cards frequently. Having too many credit cards or constantly opening and closing accounts could lower your credit score.”

Improving your chances of approval

Whether you’re prequalified, preapproved, or just thinking about applying for a new card, here are some steps you can take to improve your chances of approval:

1. Check your credit report: Review your credit report for errors and dispute any inaccuracies. You’re entitled to a free credit report from each major credit bureau once a year through AnnualCreditReport.com.
2. Pay down existing debt: Lowering your credit utilization ratio, or the amount of credit you’re currently using, can positively impact your credit score. A good rule of thumb is to use no more than 30% of your credit limit in any billing cycle.
3. Make payments on time: Payment history is one of the most significant factors in your credit score. Consider setting up automatic payments or reminders to never miss a due date.
4. Be patient: Building credit takes time. If you’ve recently applied for a credit card and were denied, consider waiting before applying again. Use this time to improve your credit profile through other healthy financial habits.
5. Consider a secured card: If you’re having trouble qualifying for a traditional credit card, a secured credit card can be a good way to build or rebuild your credit.

The bottom line

While prequalification and preapproval can give you a good idea of your chances of being approved for a credit card, they're not guarantees. Always read the fine print and consider your overall financial picture before applying.

Remember, the best strategy is to be selective about credit applications and to use any new cards responsibly. By doing so, you can potentially improve your credit score over time and set yourself up for better opportunities in the future.