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Many people who receive offers that say they are preapproved for a new credit card account don’t understand what “preapproved” means, or why they got the offer.

What does credit card preapproval mean?

Banks and other financial institutions have a pre-screening process to determine which consumers are a good fit for a particular credit card. During pre-screening, the bank checks people’s credit histories and credit scores through a third party or credit bureau, and if they meet the criteria, the bank sends them a preapproval offer.

The major credit bureaus — TransUnion, Experian and Equifax — maintain large databases of consumer credit information that banks and other financial institutions use to target consumers with certain credit profiles. Credit bureaus compile lists of consumers who meet the minimum credit standards of its bank customers. Banks then use those lists to make credit card offers to certain consumers.

Benefits of preapproved credit card offers

Preapproved credit card offers come with several benefits. They allow people to see what is available, and the terms of preapproved offers may be better than those available to the general public. For example, a preapproved credit card offer can be worthwhile for someone who has a chance to get a zero percent APR (annual percentage rate) promotional rate for more than a year, or make a balance transfer for free with a lower interest rate.

Another benefit of preapproved credit card offers is that if a person is denied, or is approved for less favorable terms, he typically gets a letter from the lender explaining its decision. The consumer also may be entitled to a free credit report. He can use the information in the letter and the credit report to improve his credit score.

Drawbacks of preapproved offers

Even though a consumer has been screened for a preapproved offer, it is possible he will be rejected for the new card if he decides to accept the offer. Words such as “preapproved” and “prequalified” are unregulated, so there are no strict rules about their use in preapproved credit card offers.

A preapproved card is just an offer, and a consumer still has to apply for the card. It is more like an invitation.

Another disadvantage is that card issuers often don’t provide invitees the precise terms it offered in the preapproval letter. If a person’s credit score is not high enough, or he has a few smudges in his credit history, he might be offered a higher APR than what was quoted in the preapproval offer.

Being screened for a preapproved credit card offer does not hurt credit scores, but accepting the offer might. Banks won’t actually check an individual’s credit history until he applies for the offer. When banks request the credit information, it is called a “hard inquiry,” and that can hurt a credit score.

For these reasons, it is a good idea to be selective about preapproved credit card offers. The more offers a person accepts, the more hard inquiries there are into his credit history, and the greater it affects his credit score. Over time, however, the negative impact on the credit score fades.

The bottom line

Always read the terms and conditions carefully before applying for a preapproved credit card offer. Just because you were preapproved for the card doesn’t mean it’s a good fit. Always select a credit card that best suits your lifestyle and financial situation.

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