Everyone knows that if you ask for credit, your score takes a hit. But what if it’s an offer you can’t refuse? Does that offer ding your credit … even just a tiny bit? Read on to find out how getting preapproved for a credit card affects your credit score.
Everyone knows that if you ask for credit your score takes a hit. But what if it’s an offer you can refuse? Does that offer ding your credit … even just a tiny bit?
And what if you rely on a third-party site to pair you with credit offers? Does that count as a request for credit with an attendant score diminution? Read on to learn fact from fiction.
First off, why should you suffer anything just for shopping around? When I go into a store and check its prices and offers I don’t get charged for the privilege. So, why does my score suffer when I shop for credit?
Well, the reason is that credit scores are developed using complex algorithms based on past experience. For example, if you meet a lion on the street and it shows its teeth, experience will tell you it’s not smiling at you.
If a person wants to take on more credit, chances are something has changed in their lives and they have decided it is in their best interest to borrow to address this change. In credit, change equals uncertainty and uncertainty equals risk.
So, until the uncertainty ends (and payments flow for a while) your heightened risk profile will result in a lower credit score.
See related: Prequalified vs. preapproved: What’s the difference?
How does credit card preapproval work?
Preapprovals exist for many credit products — from car loans to furniture loans to mortgages to credit cards. Since you have not asked anyone for credit (yet) your score is unblemished.
The preapproval is only an offer for you to be underwritten for new credit once you fill out an application. You may qualify and you may not. You have only been prequalified for a product sales pitch!
On the plus side, preapproved offers often come with incentives not available to the general public. For example, American Express may offer a rewards card with an introductory bonus of 60,000 points to new customers, but a bigger bonus of 100,000 points may be offered in a preapproved offer.
This is because Amex asked the credit bureaus to give them a list of potential consumers who meet certain predefined criteria. As these criteria are particularly attractive to Amex (maybe a high credit score and a history of big charges) it is willing to offer more to attract you. People who just show up at an issuer’s doorstep and ask for credit don’t require the same incentives.
See related: 7 ways to attract targeted credit offers
How does it affect your credit score?
All preapproved inquiries will appear as soft inquiries on your credit reports. This means the inquiries, which include the names of the companies that asked for your information, will be visible only to you. They will not be visible to any future lenders or creditors, and will not affect your credit scores.
What about using a third-party service such as CardMatch to link you with fabulous offers? Basically, they serve to help you narrow the field of possible offers without visiting every credit card issuer’s website. Third-party sites also help you know what cards you may qualify for based on a soft inquiry of your credit report.
It’s sort of like waiting to be called on in class versus raising your hand to answer a question. In the latter example, you have a slight advantage because you think you can answer the question (the match service says you meet some of the criteria) and you have increased your odds of being asked to answer it and score extra grading credit.
If you didn’t raise your hand you might have missed an opportunity. Remember, it’s a free look — soft inquiries don’t hurt your score.
I would like to point out that in the case of mortgages, it is important that a consumer know what loan amount and terms they can realistically expect to qualify for in a home loan. There’s not much sense in shopping for a house that is completely out of your qualifying range. Similar preapproval benefits also apply, although to a somewhat lesser extent, to car loans.
New credit accounts for 10% of your total FICO score, and just the act of applying will ding your score, whether you are accepted or not. In most cases, this ding is minor and short-lived.
A preapproval or card matching service is useful in lowering your risk of a turndown and subsequent point drop. When it comes to credit cards, I recommend that you be proactive and find out for yourself what you might qualify for rather than wait on a preapproved offer to come in the mail.
Just like those offers you get in the mail, the inquiry that is done will not have an impact on your credit score. And just like the others, you may or may not ultimately qualify for the card you want, but they are personalized from trusted partners. You can view your matches for free and then decide for yourself if you want to pursue any of the offers.
Remember to keep track of your score!