American banks spent $17.1 billion on marketing in 2016, according to EMI Strategic Marketing, much of it spent putting pre-qualified or pre-approved card offers in the hands of its ideal customers. But before deciding on offers you find in your mailbox, it's wise to check to see if there may be better deals and rewards lurking online. Here's how to find the best deals, and separate the best from the worst.
1. What pre-qualified actually means (hint: approval isn't guaranteed)
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When a card company makes a pre-qualified or pre-approved card offer, it's making it based on limited information. One popular card issuer asks only about your name, the last four digits of your Social Security number, and your address to decide on the cards it can pre-qualify you for, for example.
Targeted offers you find in your mailbox -- those that you don't seek out on your own -- are often sent to you based on limited information. With as little as your name, ZIP code, and a credit score range, credit card issuers have a good idea of which one of their cards you're most likely to apply for, and which cards you actually do qualify for.
Your address says something about your income, and your credit score range can speak to your creditworthiness. But banks will have to do a hard pull of your credit report before making a decision on whether to approve you, meaning that you're more likely, but not certain, to get approved for a "pre-qualified" or "pre-approved" offer.
2. Pre-qualified offers aren't always the best deal
Credit card offers aren't always created equal. The most heavily marketed cards are often advertised with different perks and terms, based on the individual. In many cases, offers for the public are better than special pre-qualified card offers you might see through unsolicited direct mail, or in your online credit card account.
If a card offers a perk (sign-up bonus, 0% APRs, and so on), it's a good idea to shop them around. Compare your offer to offers in Fool.com's credit card database to see if what you have in hand is as good as what the company is offering the public. In all likelihood, the card offer you see advertised to you may be the best the card company has to offer, but shop it around before making the decision to apply.
If you apply for a specific offer that promises a 40,000-point sign-up bonus when the same issuer has a 50,000-point bonus available, you may be leaving $100 of value (or more!) on the table.
3. A pre-qualification notice is a good benchmark for your creditworthiness
If a card company tells you that you are pre-approved or pre-qualified for a particular card, use it as a guide for understanding what other cards you might qualify for.
For example, if you're pre-approved for a top-of-the-line travel rewards credit card (key perk: sign-up bonuses), then it's likely that you have a credit score high enough to qualify you for virtually any card of your choosing, provided you have a reasonable level of income.
If you're pre-qualified for a balance-transfer card, you may have a harder time getting approved for higher-end credit cards for people with excellent credit, since 0% APR balance transfers are typically marketed to people who have lower credit scores because of higher credit card balances).
4. How to dissect a rewards card
Credit card companies are really good at obscuring the value proposition for any given card. Travel rewards are often doled out in terms of points or miles. Some of those points or miles can only be redeemed through the bank's own travel portals, or by converting them to cash, which can be a pretty bad deal.
The value of points or miles can vary based on the redemption method. Cards that offer statement credit redemptions are a good choice, because you can know with relative certainty what the points will be worth at redemption. Plus, statement credits give you the flexibility to choose your preferred method for booking travel.
Points or miles that are redeemed through a bank's proprietary travel portal may have a value that varies greatly from their stated value. I've seen several cases where proprietary travel portals have prices that are higher and lower than prices for the same hotel advertised on Expedia, for example. People who play the rewards credit card game particularly hard tend to have a credit-based rewards card and a bank-sponsored travel portal card for precisely this reason.
5. Valuing a 0% APR
What's a 0% promo APR actually worth? To the right person, a lot. In fact, people who can use the 0% interest financing to pay down existing balances, or to finance a large upcoming expense, can extract more value from a 0% promo APR than virtually any other card perk. Transferring a $5,000 balance at 18% to a 0% promo APR card for 15 months effectively saves you about $621 in interest over the life of the balance, more value than many of the very best sign-up bonus cards.
Here's how to find the best 0% cards for balance transfers and purchases, respectively:
- Balance transfers: The interest rate matters, but fees can matter more. Although many cards offer 15 months or more of 0% APRs on balance transfers, many charge a fee of 3% to 5% of the amount transferred. It can be smart to put more weight on the balance transfer fee than the duration of the promo period. A 0% APR for 18 months on a card with a 5% transfer fee is not necessarily better than a no-fee balance-transfer card that offers 15 months of 0% interest.
- 0% APRs on purchases: This is usually pretty straightforward. The longer the 0% APR, the better the card offer. But this rule can be forgotten when it comes to store credit cards (which can only be used at one store), given that many have some tricky provisions that enable the card issuer to collect retroactive interest if the balance isn't paid off in full by the end of the 0% promo period.
Common sense goes a long way
Just as you wouldn't sign a mortgage without first shopping for the best interest rate, or spend $3,000 on a washer and dryer before reading at least one review, you shouldn't sign up for a credit card before shopping it around or reading the complete terms and conditions. Take the cynical view: A pre-approved card offer is probably one the bank thinks you're most likely to apply for, not necessarily the card that's best fit for you.
Thanks to the CARD Act of 2009, most credit card disclosures are now standardized, making it easier than ever to compare offers between brand and bank. Look for a page with bolded text and a big table that lists the APR, annual fees, and special terms. That's where you'll find the information you really need to make a decision about the card that best fits what you're looking for.
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