Written by: Jon McDonald
Edited by: Austin Lang
Reviewed by: Jon McDonald
When I got my Chase Sapphire Preferred credit card, I was so excited. It was my first Tier 1 credit card, and getting approved for it felt like a sign that I was treating my finances right. Not to mention that I was going on an international vacation that summer, and I knew waiving foreign transaction fees would be a big help.
Opening new lines of credit is an important part of your financial journey. However, you may not always know what types of credit cards or loans are within reach.
That’s where prequalification comes in. Prequalification is the process through which lenders use soft credit inquiries to estimate which borrowers will qualify for certain loans and credit cards.
Still, you might be unsure which prequalification offers are best for you and what they actually mean for your odds of approval. I’ll explain how prequalification actually works and how to interpret any offers you receive.
How Prequalification Works
If you’ve received a credit card prequalification letter in the mail, you may have had some questions. Most significantly: How do they know I qualify?
Prequalification offers are based on estimates and third-party information, so they aren’t a guarantee of whether you qualify for a new line of credit. Still, they can tell you a lot about your credit eligibility.
The Prequalification Process
Most of the time, you’ll receive credit card prequalification without requesting it. Credit card companies can go through the prequalification process on your behalf, unbeknownst to you.
Credit card companies use existing customer data and information from credit agencies to determine lists of people who are likely to qualify for credit. All of the information is estimated, so receiving a prequalification offer isn’t a guarantee that you’ll qualify.
Credit Score Impact
Prequalification usually involves a soft credit inquiry, not a hard credit inquiry. Soft inquiries don’t affect your credit score, so you don’t need to worry about receiving too many credit prequalification.
Here is a chart that shows how long some items stay on your credit report:
| Item Type | Time on Credit Report | |
|---|---|---|
| Soft Credit Report Inquiry | No Report Impact | |
| Hard Credit Report Inquiry | 2 Years | |
| Delinquent Payment (30+ Days) | 7 Years | |
| Defaulted Account | 7 Years | |
| Foreclosure | 7 Years | |
| Bankruptcy Discharge | 7-10 Years | |
If you apply for a credit card, on the other hand, the credit card company will perform a hard inquiry, which will temporarily harm your credit score. But if you apply for credit sparingly, the benefits of having more credit (that you pay on time) will outweigh the costs of applying.
Keep in mind that even if you prequalify for a card, you will still need to formally apply if you decide to get it.
How to Compare Prequalification Offers
Not all prequalification offers are created equal. When you receive a credit card offer, you should first check if it’s a prequalification offer or preapproval offer. I’ll go further in-depth on this later, but for now, know that preapproval is usually a better indication of your creditworthiness than prequalification.
If you have multiple prequalification offers, it’s time to look at the factors that are important to you in a credit card. If you expect to carry a balance, look at the cards’ APRs. See if the cards have cashback offers or sign-on rewards.
If you’re smart about which ones you pick, credit cards can actually save you money. Make the most out of them.
Prequalifying for a Credit Card or Personal Loan
Usually, prequalification is a promotional offer from a credit card company. It can be helpful to know what credit cards are within your reach.
You can also apply for prequalification on your own. This will usually involve an estimate of your income, assets, debt, and potentially a soft credit check. Applying for prequalification is a great option when you aren’t sure whether you’ll qualify for a particular card.
You can also apply to prequalify for other types of loans, like mortgages and car loans. These prequalifications are usually more in-depth than credit card prequalification, and they can be an important step toward securing your purchase.
Typical Factors Issuers Consider
Prequalifications primarily rely on soft credit pull data. Credit card companies will look at the general outline of your credit history — lines of credit, delinquency, etc. This information will clue them in on whether you’re a reliable enough borrower for the type of credit they offer.
If you are already a customer with the credit card company or have applied for a credit card from them before, they may also look at any information you’ve already given them. This may include your income or your particular history with them as a borrower.
When you fill out a prequalification application on your own, you will be asked for estimates of your income, assets, and debt, and potentially your occupation.
Benefits of Prequalification
No one likes rejection, so prequalification is a great way to go into the credit application process with foresight. Sometimes, it can be hard to know what types of credit you’re likely to qualify for. You may have a short credit history or have recently experienced a big change in your credit.
When you receive a prequalification offer, the lender is telling you that your chances of approval are high. This tells you that applying for credit — and thus going through a hard credit pull — is a reasonable choice based on your chances of approval.
Limitations of Credit Card Prequalification
It’s important to remember that prequalification is not the same as approval. Even if you receive a prequalification offer, you may not get approved for credit after the lender pulls a hard check on your credit history.
Still, you’re more likely to be approved than not.
If you’ve prequalified for a credit card, you’re more likely to be approved if you formally apply. But it is important to remember that prequalification doesn’t guarantee approval.
The terms of your credit offer may also be different from your prequalification notice. You may be offered a worse APR or a lower line of credit. Make sure to read the fine print after credit approval.
How Mortgage Prequalification Works
Mortgage prequalification is different from credit card prequalification. When you consider taking out a mortgage, prequalification is a great step towards figuring out what you can afford to buy and what interest you can expect.
Before you set a budget and start looking at homes, you should try to prequalify for a mortgage. Seemingly small differences in your mortgage rate qualifications can make a huge difference in your financial health, so make sure to know where you stand.
The Prequalification Process
To prequalify for a mortgage, you’ll want to know the area in which you’re looking to buy, the estimated home price, and the down payment amount you can afford. You’ll also need your basic income and contact information.
You can often prequalify for a mortgage online with basic financial information, including how much you plan to borrow.
Once you’ve collected this information, you can apply to prequalify from your lender. Most lenders will let you apply for prequalification online, and it should only take a few minutes. Make sure to research which lenders are the best fit for you and your unique situation, especially if you’re a first-time buyer, a veteran, or may qualify for assistance.
The lender will review the information you’ve submitted and perform a soft credit check. After that, you’ll have an idea of which loans are realistic.
Benefits of Mortgage Prequalification
Before you apply for a mortgage, you should absolutely try to prequalify. Prequalifying will give you a sense of which home prices are realistic for you and which interest rates you can expect.
While I hope you’re able to secure a prequalification that you’re happy about, sometimes you need a bit longer to work on your finances. You may realize that you need some time to save and improve your credit before you try to buy a house. It’s better to learn this without getting a hit to your credit.
If you do get a favorable prequalification, you can use this as bargaining power when you formally apply for a mortgage. If you’re unhappy with an interest rate or loan size, you can try to bring up your prequalification to see if your potential lender will match it.
Mortgage Prequalification Limits
As with credit card prequalifications, mortgage prequalifications are only estimates. Just because you prequalify for a mortgage does not mean you’ll ultimately get approved for one or that the terms of the actual offer will be the same.
And if you’re happy with the terms of your prequalification, try to formally apply for it relatively soon after. Interest rates can change quickly, so try to lock in a favorable rate.
Prequalification vs. Preapproval
Prequalifying for a loan is not the same as being preapproved for one. In general, prequalification is a less rigorous process than preapproval.
For credit cards, prequalification and preapproval are often used interchangeably. Preapproval implies that the creditor may have a bit more information on you personally, whether through a previous application or a different line of credit you have with them.
But both credit card prequalification and preapproval generally involve a soft credit check.
Preapproval for bigger loans, however, is more intense. It will usually involve a hard credit check. Compared to prequalification, it is considered more reliable and is an important part of securing a loan.
The Level of Financial Scrutiny
Prequalifying for both credit cards and mortgages only results in a soft credit check. But when you’re preapproved for a mortgage, you’ll usually have a hard credit check. This is because mortgage preapprovals are more formal and important in the home-buying process.
Mortgage preapproval requires a hard credit pull and also includes your income and tax history.
When you put an offer in on a home, your letter of preapproval can help sellers decide if you can actually afford to purchase their property. Getting preapproved is more strenuous because there are more financial stakes riding on your preapproval.
Impact on Future Financial Decisions
Prequalification tells you what you can afford to buy and what lines of credit you can get. But preapproval tells sellers what size of loan they can expect you to secure before the specifics of your purchase are finalized.
Unlike prequalification, mortgage preapproval will ding your credit. But if you apply for all preapprovals within 14 to 45 days, this will count as one hard check, and the impact on your credit score will be minimal.
Flexibility and Commitment
Getting preapproved for a credit card is usually a pretty quick process. You just need estimates of your financial information.
But mortgage preapproval is much more formal and requires you to provide proof of your finances.
You’ll likely need:
- Income verification
- Your last two tax returns
- Your last two W-2 forms
Additionally, your lender will pull a hard credit check.
If you’re considering buying a home, make sure you’re ready for the mortgage application process before you apply for pre-approval.
Prequalifying Can Give You the Confidence to Apply for Financing
While prequalification doesn’t guarantee that you’ll get approved for credit or a loan, it gives you a good sense of your odds.
You may have received letters in the mail from credit card companies letting you know that you’re pre-qualified for a new card. Lenders can reach out to offer you prequalification, or you can apply for prequalification on your own. This can be useful to avoid hard credit inquiries that don’t result in a loan.
If you’re thinking of applying for a mortgage, prequalification can give you the confidence to start taking steps toward home buying. Just remember that preapproval is going to be more involved than prequalification, and you should definitely have it before you put an offer on a house.
