Shopping for a credit card without hurting your credit

One of the ironies of credit is that just applying for a credit card can impact your credit score.

And if you’re declined or don’t get the terms you need, you have to go through the process all over again – possibly with a lower score.

But if you’ve been prequalified or preapproved for a card, you might think your chances of success are a sure thing.

Not always.

Whether you received a prequalified or preapproved offer in the mail or you’re going through an issuer’s preapproval page online, it pays to understand the process and be ready to read a little fine print. And, as with all things credit, it never hurts to have a good understanding of your credit history and credit score.

What’s the difference between preapproval and prequalification?

When it comes to differentiating between being “prequalified” and “preapproved” for a credit card, there’s really no a hard-and-fast, industry-wide definition, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling.

In mortgage lending, the words “prequalified” and “preapproved” have precise meanings, but in the credit card arena they’re more terms of art than science. The meanings can and do vary widely with the issuer. One lender may use them interchangeably, while another may not.

If the issuer approached you out of the blue, “preapproval” could indicate that it has a little more information on your credit, likely from a credit bureau, says McClary. It could be working from a list of consumers who meet certain credit report criteria – like credit scores above a certain number, or consumers who’ve had no late payments in the past two years.

Often, an unsolicited “prequalification” offer indicates that you meet some type of issuer criteria, too, he says. But that information might not come from a credit bureau. The search factor could be consumers who own homes within specific zip codes, or people who are on mailing lists for certain retailers.

In both cases, the terms indicate that issuers have a limited knowledge of your financial situation. So the card offer and its terms could change dramatically once you complete an application and allow them to view your credit report.

‘Hard’ inquiries vs. ‘soft’ inquiries

And that brings us to the credit check. You’ve probably heard of “hard” and “soft” inquiries. They have precise definitions, and they mean different things to your credit.

A “soft” inquiry is done when you’re not requesting new credit or an increase in your existing credit lines. Some potential soft inquiry scenarios could include: an employer vetting you for a job; an insurance company using your credit history to set your rates; an existing creditor reviewing your account; or a new creditor vetting you as a potential customer. Soft inquiries are listed on your credit history for two years, says Eric J. Ellman , senior vice president for public policy and legal affairs for the Consumer Data Industry Association, an industry group for credit reporting agencies. But they don’t affect your credit score because they don’t involve increasing your credit lines or debt load.

A “hard” inquiry is done when you ask for new credit or (sometimes) when you request an increase in an existing credit line. These inquiries are also included in your credit report for two years. You have to give permission to the creditor to do a hard inquiry. And, because you’re requesting additional credit, hard inquiries are included in your credit score calculations for one year – whether you’re approved or not. Hard inquiries are part of the “new credit” scoring factor, which accounts for 10% of your FICO score.

An issuer that is sending you unsolicited offers may have done a soft inquiry on your credit. And if you ever want to know who’s been looking at your credit, you can pull your report and see. All inquires – hard and soft – will be listed on your credit history for two years.

How to find credit cards that offer preapproval without a hard inquiry

Some issuers also offer prequalification pages on their sites, where consumers can enter some personal information and find out which of the issuer’s cards are their best bet.

But the amount of information you get before and after you prequalify varies with the issuer. It may or may not specify whether it does a soft credit inquiry. And it may or may not indicate your chances of getting recommended cards if you actually apply. Issuers also can and do change which cards, brands and offers they include in their prequalification sites.

A few of the issuers currently offering card prequalification sites include:

• American Express
• Apple Card
• Capital One
• Chase
• Discover
• Petal

If you read the fine print on an issuer’s site, you can usually figure out if it’s doing a soft credit inquiry.

For example, one card issuer page states that “this won’t impact your credit.” Right there, you know it’s not going to be a hard inquiry, says John Ulzheimer, a credit card expert who previously worked at FICO and Equifax. At the same time, the issuer requests your full Social Security number and permission to check your credit. Put those three things together, and you can be pretty sure it’s doing a soft inquiry, he says.

Some sites are even more transparent. Apple Card (issued by Goldman Sachs), makes it clear on its site that a hard inquiry is done once your application has been approved and you’ve accepted their card offer. “If your application is declined or you reject your offer, your credit score isn’t impacted by the soft inquiry associated with your application,” the site states.

Unsolicited card offers

So how do you know if an unsolicited preapproval or prequalification offer is likely to gain you a new card in your wallet? You need to determine if it’s a “firm offer of credit,” says Rebecca E. Kuehn, partner at Washington law firm Hudson Cook.

And, unlike prequalified and preapproved, “firm offer of credit” is a defined legal term.

Here’s how it works: If a card issuer uses information from a credit reporting agency (like a credit bureau), to select you for an unsolicited card offer, it must be a firm offer of credit. That means the issuer has to set out specific criteria that will be used to prescreen you (and others who receive the same offer), ahead of time.

If you still meet those same criteria when it receives your credit application, the issuer has to give you a card. And the issuer is not allowed to change the criteria after it has made the offer.

The hitch: The issuer’s list might include things that it hasn’t yet been able to verify or that aren’t on your credit report, like your income. So even if you have great credit, if you don’t meet the income threshold, no card for you.

Or your credit picture may change by the time it receives your application. Say it wants candidates who’ve never filed for bankruptcy or who’ve never been late with a payment in the past five years. But after the offer is made, you file for bankruptcy or have a late payment, you won’t get a card.

When is an offer of credit considered ‘firm’?

So how do you know when you’re dealing with a firm offer of credit versus a more casual invitation to fill out an application?

The key is if the offer contains an opt-out notice.

When Congress allowed card issuers to use consumer credit data to make prescreened card offers, it added several conditions, says Kuehn. It requires issuers to first make a list of screening criteria in advance and to make a firm offer of credit to any consumer who meets those standards. And second, Congress requires issuers to give consumers the chance to opt-out of receiving any additional prescreened offers.

So if you see an opt-out notice for an unsolicited credit card offer, that means you’re receiving a firm offer of credit, Kuehn says. While it doesn’t guarantee you’ll actually get the card, it does indicate that that the odds are good – barring any recent changes in your finances.

But using an opt-out notice as a clue applies only to unsolicited prescreened card offers – not those that result when you go to a site and ask to be prequalified or preapproved for a card, says Kuehn.

Timing is important

So when is the best time to apply for a new credit card?

“Number one, when you can afford to pay it in full each month,” says Ulzheimer. “And, number two, when your credit scores are all above 750, so you can get the best terms.”

That means you’re using a credit card the smart way: As a payment convenience, not a short-term loan.

You also want to wait until you’re more than a year away from applying for a mortgage or car loan. Because when you apply for a credit card, the issuer will do a hard inquiry into your credit, says Ulzheimer.

Bottom line

It’s exciting to get the green light to apply for a credit card. Whether the issuer contacted you or you went online and discovered you’re exactly what the card lender wants, it’s instant validation. What’s not to love?

Before you submit that final application (and get a hard inquiry into your credit), you have to ask yourself the same questions you’d pose with any credit decision:

• How will this card help you?
• Is it a card you’d want with terms and benefits that make sense for your finances and lifestyle?
• Can you pay it off in full every month? Or will it help you pay down high-interest debt?
• Does it make sense to get this – or any – card right now?

“Celebrate that you’ve been prequalified or preapproved,” says McClary, “but take a step back and think if it makes sense.”