Pre-Approved Credit Card Offers: 4 Things You Really Need to Know

Spam email is easy to ignore, delete, or shuffle off to some forgotten corner of your inbox. But physical junk mail is a bit tougher to disregard -- especially when it's a big, bulky envelope from a bank with a pre-approved credit card offer. But just because we see them all the time doesn't mean we know exactly what we're dealing with. Here are some facts you need to know about those pre-approved credit card offers filling up your mailbox.

They Don't Hurt Your Credit ... Until You Apply.

Most people understand that when you apply for a credit card, mortgage or other loan, the potential lender will check your credit score to see if you qualify. And that inquiry will temporarily lower your score. So if an offer is "pre-approved," does that mean they've done an inquiry and hurt your credit?

Well, here's the good news: The "pre-approval" process doesn't actually involve checking your credit report.

"You are not 'pre-approved,' you are conditionally approved," explains John Ulzheimer, credit expert at CreditSesame.com. "The reason your name ended up on the list is that they will go to credit reporting agencies and buy those lists."

In other words, they sent you that offer because they have a rough idea of where you fall on the credit score spectrum. But this is a "soft inquiry" that doesn't hurt your score; they won't pull your actual credit report unless you apply for the card.

You Still Might Get Rejected.

So here's the bad news: Since they didn't actually pull your credit report before sending you that offer, you're not as "pre-approved" as it says on the envelope. When you mail in the offer and the bank checks your credit, there's a chance that you won't get approved for the card.

This happens more often than you might think, often because the recipients of those offers messed up their credit between when they got put on the pre-approved list and when they actually apply for the card.

"If you look at the low-end cards [for people with poor credit], as low as 80 percent of people who are pre-approved actually get approved," says Greg Lull of CreditKarma. "Especially in the low-credit space, a lot can change in six months." If you've got good credit and you're getting a lot of offers for rewards cards, your chances of getting approved are much greater -- more like 95 percent, because people in that range are less prone to making mistakes like late payments.

Rather than getting outright rejected for the card, Ulzheimer says it's likely they'll just approve you for a card with terms that aren't as great as you expected. Many of those letters will give you a range of interest rates and credit limits for which you're pre-approved, and your actual credit score will determine where you fall on that spectrum.

So what if you apply for one of these pre-approved offers, and then get a card with worse terms -- say, a higher interest rate or a restrictive credit limit? In that case, you could always cancel the card, but that could give a bit of a ding to your credit score: You still have the hard inquiry from the credit check, but now you don't have the benefit of the improved utilization ratio that you get from having more credit. Our advice? First, call up the customer service number on the back of the card and threaten to cancel the account if they don't give you better terms.

You Should Probably Shred Them

We say "probably" because these offers don't include critical financial information that can be used for identity theft. And without your Social Security number, no one can grab an offer out of your mailbox, fill it out and get a credit card in your name. But there's still a risk of identity theft here.

"It is a good idea to go ahead and shred it," says Gerri Detweiler of Credit.com. "I don't think it's the most popular form of identity theft ... But there's a fair amount of ID theft that occurs among family members."

A thief rifling through your trash probably won't have the requisite information to get a credit card in your name. But your teenage child or your brother-in-law who's crashing on your couch might be able to dig up your Social Security number, fill out the application and then run roughshod over your credit history with a card in your name. So if you don't want those offers, tear them up or shred them before you throw them out.

Or, on second thought...

You Can Opt Out of Getting Them

Just as there's a do-not-call list for telemarketers, so too can you opt out of receiving credit card offers.

It's pretty simple: Just go to OptOutPrescreen.com and tell the major credit bureaus that you'd like them to stop putting you on the lists that they give to banks. You can opt out for five years, or permanently.

There are lots of reasons why you might do this. Maybe you're concerned about identity theft. Maybe you care about the environment and don't like how many trees get killed by banks trying to sign you up for credit cards. Or maybe you just think it's a pain in the neck to have to tear up credit card offers.

But if you're considering getting a new credit card in the near future, you may want to stay on the list and apply for your next credit card through one of these offers. While there's no guarantee you'll be approved, your chances are certainly better than if you're just browsing the Internet for cards that look good and applying at random.

"The average person only gets approved for 30 pecent of the credit cards they apply for, and then you've got that hard inquiry but didn't get credit," points out Lull. By contrast, if you're responding to a pre-approved offer, you already know that you've got a good chance of getting approved.

Matt Brownell is the consumer and retail reporter for DailyFinance. You can reach him at Matt.Brownell@teamaol.com, and follow him on Twitter at @Brownellorama.