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It usually begins with a letter in the mail, an invitation of credit from a credit card or mortgage company. But what does that mean exactly? Is it a credit card offer? Are you approved for that home loan?
Pre-approval and pre-qualification are two completely different things, and knowing the difference could save you a lot of heartache and stress. Before you open your next line of credit, this is what you need to know about what pre-approval means.
Pre-approval is when you are offered something based on the expectation of good credit. Creditors will make an offer based on information typically provided by credit bureaus, identifying good candidates and contacting them directly. Whether it is a card in the mail, a phone call, or even a text, this is how credit companies make consumers aware of their services.
The offer is based on a soft credit pull which does not affect your credit. However, you will still need to be officially approved before you can proceed. It is not an official approval but rather an invitation to apply for the actual product, no matter whether it is a loan or a line of credit.
After you apply, the company will make a hard pull on your credit in order to review your credit history in greater detail. Unlike a pre-approval, this hard pull will affect your credit score. But, not all hard credit pulls are the same, as it depends on the quality of your FICO score. But, on average, a hard pull will drop your FICO score by less than five points. According to FICO, if your credit history is strong -- with no other credit issues -- you'll see less of a drop in your score than someone who has issues with their credit. Fortunately, the drop lasts a few month, provided that other facets of your credit history are in good standing.
Credit card companies and lenders maintain relationships with credit bureaus in order to identify people that may be a right fit for them. To respond to this invitation of credit, you will need to go through the actual approval process. This enables you to get a final decision on whether you will receive that loan or credit card.
There are multiple benefits to getting a pre-approval from a lender:
Perhaps most importantly, pre-approval helps you understand your credit score and what you may qualify for, both now and in the future.
Also: The 4 best instant-approval business credit cards
When you are pre-qualified for something, it means that you have a better chance of receiving approval. Qualifications could come from a particular credit score or range, whether you own your home, or even where you live. This information is then used to determine whether you receive a pre-approval offer.
Credit cards are frequently associated with pre-approval, but there are several instances in which you may need pre-approval:
No matter your situation, we recommend that you reach out to your creditor or lender to get a few more details regarding the pre-approval process and credit requirements.
Also: How to get pre-approved for a Chase credit card
Pre-approval is granted after you complete a credit application. You will need to provide your basic information, such as your social security number and your income.
After that, it is up to the lender to approve or deny your application. Most approvals are based upon specific credit score requirements, as well as your debt-to-income ratio. A debt-to-income ratio of 36% or lower is recommended for the best shot at approval.
Many lenders also offer tools to help you determine the best financial path for your situation. For example, Capital One offers a simple pre-approval tool that allows you to see your options before you go through the whole application process.
The most important thing to remember about pre-approval is that it does not mean approval. It simply means you have been screened by a lender, and you have been invited to apply for an offer based on your credit score or another requirement.
Before you complete an application, remember that an application will mean a hard pull on your credit, impacting your credit score, while pre-approval simply uses a soft pull. It is enough to make you think twice when you receive that offer in the mail.