What Are Pre-Approved Credit Cards?

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If you have a mail box, you probably get a few pre-approved credit card offers every month. Banks spend billions of dollars on these mailings, using data from the credit bureaus to pre-select and pre-qualify potential clients for one of the many credit cards in their lineups.

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But just because you're pre-approved doesn't mean you'll sail through the application process, and a pre-approved card may not be the best choice for you. Here's how to decide which cards are really worth applying for.

What "pre-approved" really means

Getting pre-approved for a credit card means that, based on a limited amount of information, the card company believes you're more likely than average to get approved for a particular card. 

The process typically goes something like this: a card company asks a credit bureau to supply a list of names and addresses of people who have a credit score within a specific range (750 or higher, for example). The bank can then use the provided zip codes to make some income assumptions. With these two pieces of information, the bank might decide to send an application for a high-earning cash back rewards card.

The key thing to keep in mind is that there are no promises associated with a pre-approved credit card offer because it is based on insufficient information. At the time of application, the bank will use reported income information and do a "hard pull" of the applicant's credit report to make a final decision.

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For obvious reasons, there is a very big difference between someone who has a 750 score because they have limited credit history and someone who has a 750 score because they dropped 70 points last month after making a late payment. 

So why do banks bother pre-approving people for credit cards? Frankly, it works. According to a Federal Reserve report to Congress, 53% of new credit card accounts came from direct mail offers that were pre-screened. In contrast, only 17% of new card accounts came from mailed offers that were not pre-screened. The data is somewhat dated (2002), but it's only logical that people are more likely to apply and get approved when a card offer is tailored to them. 

Pre-approval can mean special deals

Credit card companies increasingly use 0% APR balance transfers, sign-up bonuses, and other perks to lure qualified applicants to apply. In many cases, card companies tailor the offering to the individual with a better offer than is publicly available. But the reverse is also true. Pre-approved offers can also be worse than publicly available promotions.

If you receive a pre-approved credit card offer, it would be wise to see how that offer compares to the standard promotion available to the general public online. The terms of the pre-approved credit card may be very different from the standard list of benefits and perks.

Banks are notorious for offering different perks to their existing clientele, particularly inside the confines of their branches. When tellers look to their computer monitors behind the counter, they don't just see your bank balances. They can also see what kind of bank products you might qualify for. Relative to the public offers, some are better, and some are worse. It really all depends, but knowing this is paramount to making sure you're getting the best possible deal.

The key point to make here is that a bank might have 20 different credit cards, each with three different offers tailored to different people. Credit card offers change on an almost daily basis. We strive to keep on top of it, ranking the best credit cards at Fool.com based on offers that are available to the public.

Always apply online

It can be advantageous to apply online for any given credit card because, in many cases, the card company can give you an instant decision, and, in the case of denial, point you towards cards for which you will get approved. A student who has income of $15,000 won't qualify for the very best travel rewards cards, but he or she could easily qualify for a secured card or a card specifically designed for students.

Likewise, if you have high balances on other cards, you might not qualify for a card with a big sign-up bonus, but that might not be a bad thing. The bank may have a 0% balance transfer card that is more valuable for your needs, anyway. 

This kind of instantaneous feedback isn't available if you apply by snail mail. By all means, if applying by mail is your only option, go for it. But as a general rule, applying online for a credit card has more benefits than applying via paper form.

Tired of the junk mail?

If you no longer want to receive pre-approval offers, you can opt out for five years at a time (or permanently) by going to OptOutPreScreen.com, a website established to allow consumers to opt out of pre-screening consistent with the requirements of the Fair Credit Reporting Act.

Personally, I don't like junk mail, but I've concluded that junk mail that is targeted to my particular needs is a little more tolerable than junk mail that isn't. Understandably, though, many people might be annoyed by the barrage of credit card applications, so opting out may be a smart move.

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