Most credit preapprovals are associated with credit cards and loans, including mortgages. If you receive a preapproval, it will generally have no effect on your credit. Once you proceed to fill out and submit an application, this will have an effect on your credit score. This happens when a creditor pulls a hard inquiry about your credit rather than a soft inquiry.
Everyone loves approval, particularly if you didn’t do anything specific to get it. In many cases, companies send preapprovals in the mail in the form of advertisements. Credit card issuers will flood your mailbox with envelopes claiming, “You have been preapproved for the Discovery Ultra Cool Card!” Banks will say that you have been preapproved for a loan. But what does it mean to be preapproved? And if you are preapproved, does it affect your credit score? In many cases, you didn’t ask for this preapproval, so is it a bad thing?
The preapproval process does not affect your credit score because the lender would have made a soft inquiry into your credit, not a hard inquiry. A preapproval can be beneficial, too, depending on your plans. If you want to buy a home, a preapproval can give you a good ballpark estimate of what type of loan-to-value (LTV) or interest rate you can get. With credit cards, a preapproval can let you know that you have multiple credit lines available to you. Preapprovals are not a bad thing, but be careful. If you follow through with an application, it will trigger a hard credit inquiry, which can affect your credit score.
When a lender pulls your credit, they are looking at a variety of different metrics to measure how credit-worthy you are. There are effectively two types of credit inquiries (pulls) — soft inquiries and hard inquiries.
A soft credit inquiry does not affect your credit score. A soft inquiry is performed when you seek preapproval for a credit card or loan. It’s also performed when you receive mail that says you are preapproved for something that you might not have asked for. According to the Consumer Financial Protection Bureau (CFPB), a soft credit check is a review of your credit file and existing accounts. They will look at your overall credit score and various elements of macro data about yourself. However, they won’t delve too deep. A soft inquiry is typically made for some of the following reasons.
You seek or receive a preapproval for a credit card or loan
Any type of preapproval, whether it be for a loan or credit card, will need access to some of your credit information. As most lenders have various systems linked to checking your credit with the credit bureaus, this is relatively easy to do.
Employer checks your credit
When you apply for a position, an employer might do a background check on you. In this case, they would perform a soft inquiry on your credit.
You check your own credit
Every time you check your own credit, either via a report or aggregate score, you are doing a soft pull on your credit. Only you can see how many times you’ve checked your credit and performed a soft pull.
If there is something unusual going on with your credit, many credit monitoring services will perform a soft pull on your credit.
Hard inquiries do affect your credit score. When a lender asks you to submit forms for a loan, they are most likely going to request a series of documents covering the exact details of your financial situation. Every hard inquiry will show up on your credit report for all to see, which can affect your credit score. If you notice a hard inquiry on your credit report that you did not approve, then you should consider requesting its removal. Here are some of the reasons you might be asked to submit a hard inquiry.
If you submit all your documents through the official channels for obtaining a loan like a mortgage, then the lender performs a hard inquiry. This can range from minute details about your credit history to employment information such as contracts and compensation structure.
Credit card approval
Just like a loan, if you submit a full application for a credit card, the credit card issuer will most certainly do a hard pull. They will ask you a multitude of questions related to your credit and financial history.
A certain type of employer checks your credit
Certain jobs will even make a hard inquiry on your credit. Particularly if you work for a sensitive agency in the government, such as the CIA, they will want to know even more about your financial life than a soft credit pull will reveal.
Types of credit preapprovals
Getting a mortgage preapproval can help in a couple of ways. Firstly, you can find out what type of LTV and interest rate you might be able to achieve. And secondly, it can speed up the process of you obtaining a mortgage in full, making the home-buying process easier. There are three different types of preapprovals in the mortgage process.
Prequalification (Pre Quals)
This is the lowest on the totem pole of a mortgage preapproval. It usually consists of you having a short conversation with a mortgage lender or loan officer via phone. They may or may not pull your credit report. The loan officer will then issue you a “Pre Qual” letter.
A preapproval is a little more involved than a prequalification. They will ask you to provide documentation related to your income and assets. They will also certainly pull your credit reports. The loan officer will then issue you a preapproval letter, as long as their criteria are met.
Certified home buyer preapproval
A certified home buyer’s preapproval is very handy. This allows you to shop for homes as if you had the money to buy them in cash. Before issuing one, the lender will do a hard inquiry on your credit, meaning you will have to submit various minute details in regards to your finances. This type of preapproval is almost like a full-on mortgage approval process because the underwriter verifies it. You can skip to the head of the line like a cash buyer if you can submit a certified home buyer approval.
Looking for lenders that will offer certified home buyer preapproval so you can beat all the other offers? Read reviews of mortgage lenders.
Most credit card companies will do a soft pull on your credit (and preapprove you), even if you never asked them to. If you are wondering whether you can get a credit card through an issuer, you may be able to request a soft pull to see what cards you qualify for.
How did a credit card company I never heard of preapprove me?
So you, like most people, probably wonder how you got this preapproval for a card that you never applied for. The answer is simple. The credit card company most likely purchased your data from the credit bureaus, along with many others’ data. For example, credit card companies can go to data brokers and ask for 2 million names with the following attributes:
- People with credit scores >710
- A specific geographic location
- No bankruptcies in the last five years
The credit card company will then buy the list and send you mail saying that you’ve been preapproved for said card, even though you never asked.
Is there a downside to getting preapproved?
Not really. As there is no effect on your credit report with a soft inquiry, it won’t affect your credit score. However, your data is probably being sold to other companies so you will receive more unwanted preapprovals.
How long does a preapproval last?
A preapproval will generally last for 60-90 days.
What is a good credit score?
A good credit score is often considered anything in the 700s, particularly >720. A score of 750-850 would be considered excellent.
What’s next after preapproval?
The next step in the preapproval process is submitting an official application to be approved.
- Getting preapproved for a credit card or loan does not affect your credit score as long as the lender did a soft pull on your credit.
- Preapprovals are generally for credit cards, auto loans, and mortgages.
- Soft inquiries are less intrusive than hard inquiries and don’t affect your credit score.
- There are three different types of preapproval for home buyers, but credit card preapprovals are more or less the same.
- The Fair Credit Reporting Act (FCRA) allows credit bureaus to share or sell your information, which is why you receive unwanted preapprovals in the mail.
View Article Sources
- Opt out of firm offers – OptOutPrescreen.com
- Fair Credit Reporting Act (FRCA) – Federal Trade Commission
- Home Buyer Preapproval – Fidelity
- Understanding Hard Inquiries on Your Credit Report – Equifax
- 3 Different Types of Pre-Approvals – The Family Mortgage Team at LeaderOne