The difference between prequalification and preapproval depends on how a lender is extending a product offer to the borrower. Being “prequalified” typically means that a credit card company or lender has identified you as a potential customer based on the profile of your credit. This is different than viewing your credit report and there is no guarantee of approval for credit. Preapproval typically means that the lender has specifically reviewed your credit report and determined that, at the time of the review, you could qualify for a promotion or offer.
Both processes mean different things for your credit and your ability to secure specific credit cards or loans. Here are some of the key differences and how they may affect you.
What Is a Prequalification?
The differences between prequalification and preapproval differ slightly depending on the industry and lender. Here are some of the ways in which “prequalification” differs depending on the context:
- Credit Card Prequalifaction via Mail:
In this case, being prequalified, also known as “prescreened,” usually just means you fit a particular profile, such as a credit score range. In other words, the credit card companies send out millions of offers to consumers. While the offers may be legitimate, there is no guarantee you will be accepted or receive the terms of the promotional offer.
- Credit Card Prequalification With a Lender:
When working with a lender, like a bank, a prequalification will more than likely involve an assessment of your credit. You provide credit information to the lender in order to check out different credit offers. At this point, you don’t submit an application and there is no hard inquiry on your credit report. A bank representative simply assesses your eligibility.
- Prequalification for a Home Loan:
Prequalification starts by supplying information to a bank or lender about your finances. You give the lender the amounts of your debts, income and assets. The lender then reviews your stated information and lets you know how much of a loan you can reasonably expect to borrow. The amount on your prequalification letter is not a guarantee because it’s only based on the initial information provided to the lender. It is the amount you might expect to be approved.
What Is a Preapproval?
- Preapproval for Credit Card Mail Promotions
The preapproved credit card offers sent to you in the mail are usually a little more targeted than a prequalified offer. Being preapproved typically means the bank or lender has reviewed your credit score via a soft inquiry on your credit report and decided you qualify for their promotional offer.
That said, preapprovals are based on your credit score when they determined you are qualified for their offer. It can be several weeks or months before you receive the credit offer in the mail. The creditor can deny you the offer, or change the terms if they find your credit score has changed since the time of approval.
- Preapproval for Loans
When you are preapproved for a loan, it shows that a lender has actually approved you for a specific loan amount. You will receive a letter from the lender confirming the amount of your loan.
During the preapproval process, you must give financial documents that prove your claims about your financial situation. These documents include bank statements, credit report, pay stubs, and so on. The lender reviews and verifies your documents and information before extending a preapproval.
Note that, despite its name, a preapproval is not a direct guarantee for a loan. You still need to complete a formal application and go through underwriting before you receive final approval.
What Are the Major Differences?
According to the Consumer Finance Protection Bureau (CFPB), there is little difference between prequalification and preapproval. In either case, a borrower receives a letter from a bank or lender that is willing to lend to you, up to a particular amount.
The primary difference is that prequalification is based on the lender and their research, where they extend prequalification based on items like credit score or finances. The preapproval process usually involves the applicant consulting with the lender and providing more extensive documentation (including your credit accounts, bank statements, income and other financial details) to secure a preapproval.
Neither is a guarantee of a loan, as they must go through underwriting before final approval. But they provide sellers with a sense of security that you can actually buy their home if you choose.
How Do They Affect Your Credit?
The creditor or lender makes a “soft inquiry,” also known as a “soft pull,” on your credit. Soft inquiries are not a factor in calculating your credit score. When you receive a “prequalified” or “preapproved” credit card offer in the mail, it does not mean that a “hard inquiry” has been made on your credit report.
A hard inquiry on your credit report is only made when you formally submit an application for a loan or line of credit. Unlike soft inquiries, a hard inquiry may impact your credit scores.
How Can You Opt-Out?
To opt-out of unsolicited credit offers for five years, call the toll-free number 1-888-5-OPT-OUT (1-888-567-8688) or submit a form at OptOut Prescreen. If you would rather opt-out permanently, print and mail the “Permanent Opt-Out Election Form” on the Opt-Out Prescreen website.
The Bottom Line
When it comes to prequalified or preapproved credit card offers, the important thing to remember is that there is no guarantee you will be accepted for the credit card. You still must submit an application, and when you do, you can expect that there will be a hard inquiry on your credit report.
Take care of your credit and only allow a hard inquiry on your credit report when you are truly serious about securing a credit card or loan.