This week I shared a post about my slew of card applications whose sign-up bonuses will be supporting a slew of fun and exciting activities over the coming year. Two of those applications took advantage of a widespread type of application known as preapproval. These effectively let you go from window-shopping the manakin’s outfit to trying on the jacket in the store. You get to see if the jacket fits, and if you want to buy it.
What is preapproval?
There are a few distinct routes for folks to get access to credit. All of them involve assessment of credit worthiness from the bank.
- Direct application – Customer Y goes to Bank X seeking a specific card or product. Bank X then takes information from the customer, typically does a hard inquiry on the bureau(s) and uses gathered information to assess eligibility and provide an approval to customer Y.
- Preapproval application – Customer Y goes to Bank X seeking either eligibility for a specific product, or eligibility for a range of products. Bank X then takes information from the customer, typically does a soft inquiry on the bureau(s), and uses gathered information to assess eligibility and provide a high confidence offer (or offers) to customer Y. Customer Y must accept presented offers (“apply”), after which a hard inquiry is placed on bureaus.
- Prequalification offer – Bank X solicits customer Y because they think they are a profitable customer. This means Bank X did screening for various standards, credit and otherwise, to define target and eligibility. They then marketed these individuals via email, direct mail, phone, or some other channel. They know with high confidence eligibility because they have already filtered most ineligible folks out. Marketed customers must proceed in submitting formal applications and/or accept offers.
What preapproval provides is high-certainty on approval outcome and specific terms
Known outcomes allow for planning and optimization. Knowing approval status is the most typical (“congratulations you are eligible for product X”). Knowing specific terms (ex. credit line, APR) is also becoming increasingly common across pre-approval systems. This allows for customer to not only to skip products where those standards don’t meet their expectations or needs (too low of line, too high of APR, etc.)
The icing on the cake is the soft-inquiry
“Soft” inquiry means “invisible to credit providers.” This means Bank X is able to make a decision, Customer Y is able to get high certainty on eligibility, and there is no adverse impact from shopping activities. The presence of a “hard” inquiry means credit seeking behavior, which is a sign of risk to lenders. That means that credit score is adversely impacted, and that lenders look at inquiries and may say “no, too risky”, or “yes, but [lower line or higher APR]”. More is objectively bad, but in my experience the impacts for “reasonable” activity (not gaming activity with lots of applications like me) is nominal.
What does that mean for folks hunting for credit cards?
Skip the hard inquiries. Shop around. See what meets your needs. Apply with certainty, and minimize your hard inquiries in the process.
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