Just for you! A so-so offer (maybe)

You could get turned down for your 'preapproved' credit card, and you might get a lower interest rate if you shop around on your own.

By MSN Money Partner May 8, 2013 12:30PM
This post is by Charles Passy from partner site MarketWatch.

Opening the mail to find a “preapproved” offer on a credit card can feel like being welcomed into an exclusive club with lots of benefits. In reality, you may not even make the membership list.

Man paying with credit card © UpperCut Images/UpperCut Images/Getty ImagesAs the economy rebounds, credit-card solicitations are on the rise—direct-mail pitches increased by 18.5% in the first quarter of 2013 over the previous quarter, according to the Mintel Group.

And preapproval offers are a major part of the industry’s marketing arsenal, says Casey Bond of GoBankingRates.com, which tracks the credit-card industry. A recent study by that company found that including the word “preapproval” in a pitch could increase the response rate by 77%.

But while “preapproval” implies exclusivity, it doesn’t have anything to do with the quality of the card’s benefits, says Ben Woolsey, director of consumer research for CreditCards.com. In fact, some preapproved cards have rates far higher than the current average of 15%.

What’s more, being a candidate doesn’t make you a winner: Odysseas Papadimitriou of CardHub.com, another site that tracks the industry, says the rejection rate for preselected applicants can reach 30%, even among relatively affluent borrowers.

A variety of factors contribute to those “Sorry, no card” decisions, including having a relatively high ratio of debt to income or a spotty employment history. In other words, a high-powered, well-compensated executive can be turned away for recently taking out a jumbo mortgage. Also, when a card issuer makes a preapproval offer, says Papadimitriou, it is typically doing so on the basis of one credit report, so information held by other credit agencies may weigh against the applicant.

Since the act of applying for credit itself can negatively affect a credit score, borrowers are better off if they aren’t swayed by a preapproval offer, say consumer experts. That is particularly true if a major purchase—like a home or car—is in an applicant’s near future. “My rule of thumb is to hold off [on card applications] for six months if you need the best credit score possible,” says Papadimitriou.

The good news, for borrowers who want or need new credit cards, is that some of the offers filling their mailboxes are becoming more competitive. The average interest rate on cards for those with excellent credit dropped by 1.69 percentage points, to 12.79%, in the first quarter of the year. 

Even if an attractive preapproval offer shows up in the mail, however, consumer experts note that the same offer—or a better one—may be found on card comparison websites like Bankaholic, CompareCards.com, or CardHub.com. On top of that, the websites make it easier to sort through myriad cards—rather than combing through one printed solicitation after another.

The sorting is likely to pay off, since interest rates can vary greatly; in the latest survey from CreditCards.com, rates ranged from 10.29% to 23.64%.

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