In this article:
- What Is Preapproval?
- Do Preapproved Offers Affect Your Credit Score?
- Benefits of Getting Preapproved
- How to Get Preapproved for Credit
When you receive a preapproval for credit, it means a lender or creditor has prescreened you and found you meet at least some of the criteria they are looking for, such as credit and payment history. While final approval and terms aren't guaranteed, a preapproval indicates you're a promising candidate for a credit product, and it typically includes the terms you might receive.
Fortunately, in most cases, a preapproval has no direct impact on your credit since the process typically involves a soft inquiry of your credit. If you respond to a preapproved offer from a credit card issuer and submit an application, the card issuer will do a more thorough review of your credit. However, a preapproval for a mortgage or car loan usually requires a hard credit inquiry that could result in a small, temporary dip in your credit scores.
What Is Preapproval?
Preapproval is when a lender or creditor determines you meet specific criteria that make you a strong candidate for loan or credit card. Typically, the process involves pulling your credit using a soft inquiry, which doesn't hurt your credit scores. But as you'll see, the preapproval process varies depending on the type of credit you seek.
Preapproval for a Mortgage
Getting a mortgage preapproval is an essential step in the homebuying process, primarily because you receive a preapproval letter from your lender indicating your tentative approval of a mortgage loan up to a specific amount.
You apply for preapproval in much the same way you apply for a mortgage: You submit your information, including income, assets, employment history and other pertinent information. The lender then reviews your credit after pulling your credit report and credit score from one of the three major credit bureaus: Experian, TransUnion or Equifax. While the hard inquiry may negatively affect your credit, the impact should be small and only last a few months.
If the lender decides to preapprove you, you'll receive your preapproval letter, which is usually good for 30 to 60 days. The letter, sometimes referred to as a prequalification letter, assures a home seller you are likely to receive sufficient financing to purchase the home based on the information you enter on your application.
Preapproval for a Car Loan
A preapproval for a car loan lets you know how much money you can borrow and can also help you negotiate better terms with the dealer. Like a mortgage preapproval, you'll typically need to fill out an application, providing personal information like your monthly income, debt balances and employment history.
A car loan preapproval can affect your credit because the lender will perform a hard credit inquiry to review your credit. Once preapproved, the lender will inform you of the specific amount you can borrow, along with your interest rate. Some lenders may give you a check you can use as negotiation leverage at the dealership.
Preapproval for a Credit Card
With credit card preapproval, you may seek out a specific card you'd like to get preapproved for or receive prescreened offers by email or in the mail from issuers who have determined you may be a good candidate for the card and are inviting you to apply. You can then decide whether to accept the offer and complete the application process—just be sure you know all the card's terms before applying.
A preapproval indicates you meet the basic requirements for a specific credit card, but you shouldn't interpret it as a guarantee. Final approval is still subject to a hard credit inquiry for a more thorough review of your credit along with your income, debt balances and other factors.
Preapproval for a Personal Loan
As with credit cards, you can typically receive preapproval for a personal loan with only a soft credit pull which won't affect your credit scores. A preapproval for a personal loan is a way to determine if you're eligible for a loan before formally applying and triggering a hard credit inquiry.
In this case, the lender reviews your credit, income and other factors to determine if you meet the loan requirements. Additionally, the lender will provide you with an estimate of your potential loan amount, annual percentage rate (APR) and fees with the loan.
Do Preapproved Offers Affect Your Credit Score?
Generally, preapproved offers, such as those from credit card issuers, don't directly impact your credit score. But once you accept the preapproval, the lender will likely review your credit history as part of a more thorough final approval process, which will result in a hard inquiry.
As noted above, the preapproval process for a mortgage or auto loan requires a hard credit inquiry. Credit inquiries have a minimal impact on your FICO® Score☉ , reducing it by less than five points for most people.
Benefits of Getting Preapproved
Getting preapproved for a mortgage can give you an idea of your borrowing limit so you can shop for a home or car with confidence. Having a lender willing to finance your home purchase makes you a more attractive candidate to a home seller.
A credit card preapproval and other types of credit also has significant benefits, such as:
- Provides a degree of certainty: When you receive a preapproved offer, it's not a guarantee of approval. However, it indicates you meet the card issuer's basic eligibility requirements so that you can proceed with the application process with at least some confidence.
- No damage to your score: Preapproval for credit products other than mortgage loans only requires a soft credit pull to determine your eligibility for a credit card.
- Lenders compete for your business: Rather than searching for potential credit cards to apply for, the beauty of preapproved offers is that lenders may send them to you. Just be sure you understand all the card's terms before you apply formally.
- May include promotions: Many credit card preapprovals offer valuable benefits such as a 0% introductory APR for a specific period, enabling you to pay off high-interest accounts and save money on interest charges.
- Possible bonuses and rewards: Some card issuers entice you to sign up for their credit card by sending you preapproved offers that include an introductory bonus, rewards and other perks.
How to Get Preapproved for Credit
Depending on the type of credit you're applying for, preapproval could be a good first step in the credit approval process. It gives lenders and creditors a glimpse of your creditworthiness and gives you insight into the loan or credit card you might receive.
Of course, preapproval doesn't guarantee acceptance for any credit product; creditors and lenders need to verify your information before making a final decision.
Follow these steps to get preapproved for credit:
- Check your credit. Before starting the process, it's wise to get an idea of where your credit stands. You can get a free copy of your Experian credit report and credit score or get access to your reports from all three major credit bureaus at AnnualCreditReport.com. Checking your own credit does not affect your credit score.
- Increase your approval odds. When reviewing your credit reports, identify any issues impacting your credit score and take the necessary steps to address them.
- Gather your personal documents. Since final approval will ultimately require verifying your information, ensure the information you submit for preapproval is accurate from the start. Refer to your pay stubs, tax documents, account statements and other essential documents when entering your financial and employment information.
- Submit a preapproval application. Provide your personal and contact information, annual income, employment details and financial information. For credit cards, an issuer may send you a preapproved offer, in which case you simply need to submit a formal application to proceed.
- Agree to a soft credit check. Since a soft inquiry doesn't affect your credit scores, you can prequalify with multiple lenders to find the best interest rate available.
- Find out the lender's decision. If approved, you'll find out your borrowing amount, interest rate and repayment term. Generally, the better your credit score, the lower the interest rate you'll pay.
- Submit a formal application. The lender's initial approval is based on the information you've given them up until now. The final step involves supporting your application information by uploading supporting documents like your bank statements and tax returns.
The Bottom Line
A preapproval isn't a guarantee for new credit, but it can help you determine whether you're likely to be approved. If not, take steps to optimize your credit before you apply. Thankfully, there are many ways to improve your credit, including:
- Make consistent on-time payments. Your payment history makes up 35% of your FICO® Score, making on-time payments one of the best ways to boost your score over time.
- Keep your revolving debt balances low. Your credit utilization ratio, or the amount of your credit limit you're using, accounts for 30% of your credit score. Keeping credit card balances low can help your scores.
- Limit hard inquiries. Hard inquiries may result in a small, temporary dip in your credit score. Limit them by only applying for credit you need.
Finally, consider trying Experian Boost®ø. This free feature gives you credit for bills you already pay, including your utilities, phone, rent and streaming services. You'll even get credit for past on-time payments.
