Got an offer in the mail saying you’re “prequalified” or “preapproved” for a credit card? Great! But what does that mean for your credit and actual approval odds? Read on to learn more about the main differences – and similarities – between prequalification and preapproval.
You open your mailbox to find it stuffed with letters promising that you are prequalified for a new credit card at a low interest rate. Or maybe these letters state that you are preapproved for the latest rewards card from Chase, Discover or Citi.Is there a difference between being preapproved or prequalified? And does either mean that creditors will automatically approve you for a credit card when you apply for it?
The answer, at least to the first question, is complicated. Many credit card providers use the terms “prequalified” and “preapproved” interchangeably. But there is a big difference between these two terms when you’re applying for a mortgage loan.
And whether you’re preapproved for a mortgage or credit card, this doesn’t mean that lenders or banks will approve your application once you send it in. These financial institutions will still study your finances in-depth before approving your credit or loan application.
What to know about being prequalified vs. being preapproved
Mike Brown, head of operations and chief risk officer at Homerun in Denver, said it’s not surprising that consumers are confused by the terms “prequalified” and “preapproved.” There’s no standard in the credit industry for what these terms mean.
Brown pointed out that some credit card companies and lenders take a more cursory look at your financial information, while others spend more time analyzing it during the prequalification and preapproval stages.
How prequalification, preapproval affect credit
Some credit card companies will perform what is known as a soft pull of your credit reports, meaning they’ll study your recent payment history and how much you owe before they send you a letter stating that you are eligible to apply for their card. (A soft pull won’t impact your credit score.) They’ll call this a prequalification. Other financial institutions will do the same thing and call it a preapproval.
“In actuality, how much verification is actually done can vary wildly by lender,” Brown said.
Credit card companies often use the words “preapproved” and “prequalified” to mean the same thing, which can cause confusion among consumers, said Richard Best, writer for savings and coupon site DontPayFull.
Differences between preapproved, prequalified
Best said some credit card companies might use the word “preapproved” to mean they have taken a more in-depth look at your credit history than they would have if they were just prequalifying you for a card.
But these words have at least one thing in common: “In neither case are you guaranteed approval for a credit card,” Best said.
You might apply for a card that you’ve been preapproved for only to have your application denied, Best said. That’s because you were preapproved only to apply for the card.
Once you apply, credit card providers will take a deeper look at your credit. At this stage, they might find that you have too many late payments in your credit history, your credit score is too low, your monthly debts are too high or your income isn’t high enough.
The letter stating that you are preapproved might even come with the promise of a low interest rate. But that interest rate isn’t guaranteed, either, Best said.
You might apply and get approved but also get hit with a higher rate. Again, that’s because credit card providers wait until you officially apply before looking deeper at your credit.
“Credit card issuers comb through credit data to identify consumers who generally fit their credit profile,” Best said.
See related: Best low interest credit cards
How prequalification, preapproval work with mortgages
There is an important difference, though, between prequalification and preapproval when it comes to mortgages.
Todd Huettner, president of Denver-based mortgage bank Huettner Capital, sums it up this way:
- When a lender says you are prequalified for a mortgage loan, there isn’t much certainty there. It’s basically a guess.
- When a lender says you are preapproved for a mortgage, that lender is far more certain that it will lend you money when you officially apply for your mortgage loan.
- Here’s how a prequalification usually works: You call a lender on the phone or fill out an online form and provide a verbal estimate of your debts and income. The lender will then check your credit and tell you whether you’d be approved if you were to apply.
The problem? As Huettner said, lenders are relying on you to be truthful and accurate when you provide your income information. Lenders do not request documentation verifying your income at this stage. Because of this, a prequalification offers no guarantee that you will qualify for a mortgage.
A preapproval, though, is different. In a preapproval, you’ll send lenders copies of your most important financial documents, such as your last two years of tax returns, last two months of bank account statements and two most recent paycheck stubs. Your lender will then use this information to verify your income. Your lender will also check your credit again.
Once a lender does this, it will send you a preapproval letter stating how much of a mortgage it is willing to give you.
Huettner said a preapproval is a far more reliable predictor of whether you’ll qualify for a loan. And before you shop for a home, you should always seek preapproval. This way, you’ll know how much home you can afford.
See related: Instant approval credit cards