Your credit score is an important number that can have a big impact on your life. Although it is just three digits, it can tell potential lenders a lot about your creditworthiness. If you regularly monitor your finances, you may notice when your credit score lowers. If it happens unexpectedly, you might ask, “Why did my credit score drop?”

In this article, I’ll walk you through some of the reasons behind a drop in credit score. Plus, I’ll also highlight ways to get your credit score back on the right track. 

Why did my credit score drop? 11 Common factors

A credit score is a reflection of your credit report. The factors that affect your credit score can pull it down or build it up depending on your choices and things like length of credit history, payment history, and more.

So wondering, “Why did my credit score drop?” Let’s look at eleven common reasons for a decrease in your credit score.

1. Too many hard credit inquiries

When applying for new loans, you are likely keeping a close eye on your credit score. You may notice a sharp drop while you are in the midst of applying for new loans.

In this case, the drop in your credit score is likely a result of too many hard credit inquiries. When you apply for credit, lenders and credit card issuers will pull your complete credit report to determine your creditworthiness.

Although credit inquiries play a small role in your overall credit score, it could be the reason behind your most recent drop.

If you’ve applied to several new lines of credit in the past month, this is the most likely reason for the drop. If you’re concerned that checking your credit score lowers it, know it is not considered a hard inquiry. You’ll only need to worry about hard inquiries if you apply for a new loan or line of credit.

2. Late and missed payments

A late payment can blemish your credit report, decreasing your credit score. That is especially true if you make late payments consistently. If you missed a payment altogether, that could cause your credit score to drop too.

Lenders favor borrowers who can make on-time payments regularly. A lower credit score could indicate to potential lenders that you aren’t consistent about making on-time payments.

3. Growing balances

The balance of revolving credit lines—like credit cards—can fluctuate each month.

For example, if you have credit card debt, it can grow each month that you don’t pay off your credit card account balance in full.

A growing amount of revolving debt leads to an increase in your credit card utilization ratio. If you have a $10,000 credit limit with a balance of $5,000, then you have a utilization rate of 50%.

In the FICO scoring model, around 30% of your FICO score comes from amounts owed. Knowing this, I recommend keeping your credit card and other revolving balances as low as possible. Many experts recommend keeping your credit utilization rate under 30% to prevent a negative impact on your score.

4. Why did my credit score drop after closing an old account?

Although it can be tempting to close an account because you may think it’s the best way to get out of debt, that can lead to a drop in your credit score.

FICO credit scores factor in the length of your credit history when calculating your score. Older accounts are considered a positive feature of your credit history.

After all, if you’ve been able to manage your credit for a long period of time responsibly, then lenders want to work with you. As you close older accounts, the average age of your credit accounts will fall and possibly drag your credit score down as well.

5. Bankruptcies on your credit report

Foreclosures and bankruptcies can significantly impact your credit score. A big dip in your credit score could result from a recent foreclosure or bankruptcy.

In most cases, this kind of mark on your credit report will have a large negative effect on your score. Unfortunately, the effects could impact your credit score for years.

6. Identity theft

Why did my credit score go down when nothing changed?

This question gets asked a lot. After all, why would your score drop if nothing has changed in your financial situation? One reason is identity theft.

Being a victim of identity theft is one of the worst reasons there is a drop in your credit score. If this happens, people can use your identity to apply for loans such as credit cards, open utility accounts in your name, and even steal your tax refund!

That’s why I suggest monitoring your credit regularly so you can ensure everything on it is legitimate. If someone is racking up debt and not paying bills in your name, it can be detrimental to your finances.

7. An error on your credit report

Another answer to the question, “Why did my credit score go down when nothing changed?” is simply a mistake on your credit report.

It’s sometimes possible that creditors made an inaccurate report to the credit bureaus (Equifax, TransUnion, and Experian). The error, in turn, impacts your score.

As soon as you identify an error, contact the reporting company to dispute the error on your credit report. You might also want to contact the credit bureaus to inform them of the error.

8. Credit limit was reduced

Another reason you could have a drop in your score is if a credit limit was reduced due to lack of use or due to changes in your credit. It could reduce your overall debt-to-credit ratio, which could impact your score.

You can contact the company to ask why they decreased your limit and possibly have it restored if possible. Also, paying down the balance will improve your score, so work on a debt reduction strategy and pay off your card monthly.

9. Paid off a loan

“I paid off a loan, so why did my credit score drop?”

While paying off a loan is a good thing—after all, you’re getting out of debt!—it can negatively affect your credit score. There are a few reasons for this:

• You reduced your credit mix.
• You closed the last account of a certain type of credit.

Paying off a loan reduces the amount of debt you owe and the type of credit accounts you have. Part of your credit score for most scoring models includes your credit mix and how many different types of credit you have.

Having a manageable mix of auto loans, student loans, mortgage payments, and credit cards can help show lenders you’re a responsible borrower—regardless of the type of credit being offered. When you pay off a loan, like a car loan, you’re removing a type of credit from your credit report.

10. Charge-offs on unpaid balances

If you simply stopped paying your debts, your creditors might write off the debt as uncollectable, known as a charge-off. It doesn’t mean you don’t have to pay your debt, but you may be paying a debt collection agency instead of your original lender.

Having a charge-off on your credit report can have negative effects. A charge-off can show up on your credit report for years to come. This makes improving your credit score or securing new credit accounts even harder.

Luckily, you may be able to remove a charge-off from your credit report.  

11. Debt settlement

Debt settlement is negotiating with creditors to pay off your debt for a smaller amount than you owe. While this might sound like a good way to reduce debt, your credit score will feel the effects of settling debt.

When you settle a debt, you and your creditors are agreeing that you will never have the funds to pay all of the amount owed. The creditor takes a loss on the debt in the hopes of recouping some of the money they’re owed. This agreement is reported to the credit bureaus, who add it to your credit report.

Debt settlement is generally preferable to bankruptcy, but it can cause similar problems to your credit score. Settled debts tend to stay on your credit report for seven years, according to Experian. When a new lender sees that you settled a debt, they may be wary of lending money to you.

Expert tip: Don’t panic if your credit score changes slightly

Credit scoring models, like FICO, use formulas to calculate credit scores. Small changes in these formulas can cause your credit score to fluctuate slightly.

If you find your score went up or down slightly, it’s not usually a cause for concern. I recommend focusing on making payments on time, paying off debt, and watching your credit score for any big changes.

Why did my credit score go down when nothing changed and how can I tell?

The best place to start is by regularly monitoring your credit score. I have two favorite resources that will allow you to monitor your credit report for free:

Credit Karma

Credit Karma is a user-friendly site that will send you helpful alerts about your credit score. If there is a drop, then you’ll be able to act quickly.

With Credit Karma, you’ll have access to your credit score and credit reports from two of the three major credit bureaus.

The reports are updated weekly, so you’ll be able to check your credit report whenever you’d like to.

Annualcreditreport.com

The name gives away the services offered by this site; you’ll be able to see a credit report every 12 months. With this free credit report, you can check to ensure all your information is accurate every year.

Both options are trusted and useful ways to monitor your credit score. Take a minute to consider these options and decide which option will work best for you.

4 Ways to increase your credit score after a drop

If you’ve noticed a recent drop in your VantageScore or FICO credit score, rebuilding your credit might be a top priority. Luckily, it is completely possible to rebuild your credit.

As you improve your credit score, you’ll unlock better loan terms and rates for big purchases such as a house down payment or car. Better loan terms can result in thousands of dollars of savings over the lifetime of your loan.

If you implement the strategies below, you might be surprised how quickly your score can rebound. Let’s take a closer look at the best ways to start improving your credit score.

1. Pay down revolving debt balances

Revolving debt is associated with lines of credit that you can access with ease, such as your credit card or your home equity line of credit. Each month, you can potentially increase or lower the amount of this revolving debt.

These loans differ from installment loans, such as a personal loan with a scheduled repayment timeline and monthly payment. If you’ve allowed your credit card balances to grow, that will likely hurt your credit score, causing it to drop.

The solution is to pay down credit cards fast. Although becoming debt-free can be challenging, paying down your debt is completely possible.

Consider using the snowball method to kickstart your debt repayment journey. Along the way, you may need to consider starting a side hustle to increase your income or meal planning to stay on budget.

As you start to pay down your debt, celebrate the small wins. Every dollar you pay down is progress on your journey. It may not be an overnight path, but every step you take will bring you closer to being debt-free.

Plus, you’ll likely raise your credit score in the process.

2. Make on-time payments

Lenders value borrowers who can consistently make on-time payments to their debts.

In fact, making on-time payments is one of the fastest ways to improve your credit score. One way to consistently make on-time payments is to automate your finances.

Automation can be the key to learning how to manage your money efficiently. You’ll no longer need to worry about whether or not you remembered to pay your bills. Instead, all of your debt payments will be made on time without any headaches for you.

3. Credit builder loans

A credit builder loan is a surefire way to improve your credit score if you can make on-time payments. If you take out a credit builder loan, the loan amount will be held in a bank account until you repay the loan. Throughout the loan, you will make on-time payments that the lender reports to the credit bureaus.

The payments you make along the way will include both principal and interest. At the end of the loan term, you will receive the money the lender has been holding in your account. You’ll be able to build your credit score and learn how to save money at the same time.

4. Take our free course on how to build good credit

Since a good credit score can save you thousands of dollars, it is vital to take action. If you want to learn more about the ins and outs of building credit, then our free “Build Good Credit” course is a great resource.

You’ll learn more about the factors that affect your credit score.

Additionally, you’ll learn more about specific action steps that you can take to improve your credit score.

How long does a credit score drop last?

The amount of time a drop in your credit lasts depends a lot on what caused it to drop in the first place. Using a large amount of your credit card limit or having a few hard inquiries on your credit report, for example, often only drops your score temporarily.

Missing several payments or settling a debt, on the other hand, will likely cause a large drop in your score—and therefore take longer to build back up.

The best thing you can do if your credit score drops (after checking for fraud) is to continue making on-time payments and working to lower the amount of credit you use.

Why is my credit score so low when I have no debt?

There are lots of reasons why your score might be low even if you’re not carrying debt—and your lack of debt may be part of the cause. Creditors generally like to see a mix of different credit types when looking at your credit score.

For example, a person with a good credit mix might have a car loan, mortgage, and credit cards with on-time payments.

Articles related to credit scores

This post offers much information to answer, “Why did my credit score drop?” To find out more about credit, check out these other great reads!

• How Does Credit Work? Here’s What You Need To Know
• The Credit Builder Loan And How Credit Builder Accounts Work
• How To Use Credit Cards Wisely

It’s possible to rebuild your credit!

A good credit score can unlock better loan terms for the big purchases in your life. With better loan terms, you can potentially save thousands of dollars over the lifetime of these major purchases, such as a home.

Remember, at the end of the day, it’s all about using credit wisely. For more terrific financial tips on improving your credit, ditching debt, saving money, and building wealth, tune in to the Clever Girls Podcast and YouTube channel!

The post Why Did My Credit Score Drop? 11 Reasons appeared first on Clever Girl Finance.

What is credit, how does credit work, and why is it important? When it comes to making big purchases like buying a home or financing a business, knowing and understanding your credit is super important! Find out all you need to know about credit here!

Your creditworthiness is used to determine your eligibility for “pay to use” services like your cell phone or your apartment rental. It’s also used to determine your interest rate on your credit cards and loans.

Some employers may even use your credit report as a determining factor when considering you for a job! Given how important your credit is, let’s get into how credit works.

What is credit and what makes up your score?

Your credit is essentially your ability to borrow money in the form of a loan or credit card at a specific interest rate based on your past borrowing and payment history. Your credit score is made up of several factors, including history, payments, debt to credit ratio, age of the debt and more.

That said, in order to full answer the question, “how does credit work?”, it’s important to know more about each of these different factors.

Credit history length

Your length of credit history is how long you’ve had credit for. If you’ve had an account open for many years, it’s usually better for your credit score.

It obviously takes time to build up a good credit history length, so this isn’t something you can immediately change. If you have no credit at all, you can start building the history length by opening an account.

Your credit history is a compilation of all credit cards and loans you’ve ever had. All the way back to that first credit card you signed up for in college in order to get the free t-shirt (been there, done that!).

It’s the history of how (well) you’ve paid your bills in the past, and it records the amount of cards you have, how much you owe, etc.

If you are new to building credit, you might have an insufficient credit history. But this can be remedied over time by mindfully applying for credit and paying your bills on time.

Credit mix

There are a lot of types of credit, including credit cards, mortgages, student loans, etc. So, your credit mix is how much of the different types of credit you have.

The Ascent from Motley Fool explains that having a good credit mix means a balance of both revolving and installment credit.

History of payment

History of payment is a very big factor that helps determine your overall credit score. It is how well you’ve paid back your debts over time, and it accounts for 35% of FICO scores as well as being important for VantageScore, claims Forbes.

So, if you’re wondering where to start with building good credit, paying on time is an extremely important thing.

Credit utilization (Debt to credit ratio)

Credit utilization is another very important thing for determining your credit score. It is also known as your debt-to-credit ratio, and it is essentially how much you owe, divided by the amount of available credit you have. Using more than 30% of your available credit can make your score drop.

So you want to be careful not to take on any debt that you don’t need to and pay off your credit cards and loans as soon as possible.

New credit

Any new credit cards or loans can affect your credit. If a hard inquiry (when your credit is checked for a loan or credit card) is made when you apply, it can affect your score.

However, Bankrate explains that new credit may also have a positive impact if it improves your credit mix or utilization.

So it’s important to be aware of how this can impact your score before you apply for anything new.

Two types of credit

So, how does credit work when it comes to the types of credit that exist? There are two main types, called revolving and installment credit. Here are the details.

1. Revolving credit

Revolving credit allows you to continue to borrow money on a revolving basis, even if you are currently paying the money back. The best example of this is a credit card, which allows you to make payments while simultaneously using the card. But be sure to learn how to use credit cards wisely.

Other examples of revolving credit include home equity lines of credit and personal lines of credit.

2. Installment credit

Installment credit is a fixed amount of money that you borrow and then pay back over time. You’ll make payments on it continuously until the amount is paid back. But you will pay back with interest.

A home mortgage is one of the best examples of an installment loan, and there are also student loans and other types of loans. Other examples of installment credit include car loans and personal loans.

How your credit score is calculated

So, how does credit work when it comes to your credit scores? In the US, there are 3 major credit bureaus: Equifax, Transunion, and Experian.

Their main job is to collect your credit information from various sources, aggregate them into a report, assign you a credit score based on their methodology, and make this information available to your potential lenders.

You’re assigned a credit score, a number typically between 300 to around 850. Your credit score basically reflects how well you’ve managed your credit cards and loans in the past. A good credit score is deemed as 700 and above.

There are two main credit scores used by these bureaus:

FICO score

The FICO score is the most popular scoring method. Factors used to calculate your FICO score include payment history, debt owed, age of credit, new credit/inquiries, and types of credit.

90% of the top lenders use FICO scores. Score range: 300 to 850.

Fico scores are extremely important to consider, but there is another main scoring method.

VantageScore

The VantageScore is another scoring model. It was created by the three major credit bureaus.

Factors used to calculate your VantageScore include payment history, credit utilization, type of account and age, and credit behavior. Score range: 300 to 850.

Expert tip: Credit isn’t everything

Your credit score does matter for a lot of things, for you as a borrower, from getting a mortgage to being approved for a new credit card.

However, it’s essential to remember that your credit score is just part of your financial picture. There are other things that matter just as much, like saving, investing, and retirement planning.

If you are trying to build your score and it isn’t where you’d like it to be, don’t worry. Focus on the things you can control by continuing to choose financial wellness, and your credit will eventually improve with this intentional action.

Key tips to build and maintain your credit

Now that you’ve answered how does credit work, let’s focus on the best way to build credit.

Building your credit

It’s a smart idea to try to improve your credit score as much as possible. It can help you getting the best interest rates on loans, credit cards, and many other types of debt.

Employers may even leverage your credit score as part of their background checks depending on the role you’ve applies for. Here’s what to do to make your credit score better.

Understand your current credit standing

In order to improve your credit score, you need to know your current credit standing. This is essentially the starting point when it comes to the best way to build credit.

So, what is your credit score? When was the last time you checked your credit? Is everything on your credit report documented accurately?

Furthermore, are you paying all your bills on time? Are you aware of any delinquencies?

You should be able to answer all of these questions about your credit at any point in time. Then, you’ll have a good idea about your credit status before you apply for any loans.

Knowing your credit score and what is in your credit history will also make you aware of credit fraud or identity theft of your personal information. Then, you can figure out what to do if your identity is stolen.

It is very important to catch this early because if you catch it too late and your credit has already been damaged, it can be a pain to fix.

In the US, you are entitled to a free copy of your credit report from each of the three bureaus once a year, according to USA.gov. Check out your free credit report at annualcreditreport.com.

It’s a good idea to obtain a copy of your current credit report from all three credit bureaus. After all, you want to know where you currently stand with your credit.

You need to understand what has been reported about you to the credit bureaus. That means information regarding your payments, how much you owe, your different account types, and any late payments or delinquencies.

Pay your bills and loans on time

Paying your bills on time is a big part of how credit works. It proves your creditworthiness to lenders and has a huge impact on your credit score.

If you are behind on any payments or have bills piling up, you should try your best to catch up as soon as you can. Call your creditors to create payment plans and set up new payment dates.

It’s also a good idea to set reminders for yourself for all your bills. Then you can make sure you don’t forget to make any payments in the future.

Build all your recurring payments (along with their due dates!) into your budget. Also, consider automating your payments.

Reduce your overall debt-to-credit ratio

You can do this by paying down debts and/or paying them off each month. Your overall debt load, as well as your percentage of credit utilization, affects your credit score. You can calculate your credit card utilization here.

Let’s say you have a credit card with a limit of $1,000, and you owe $950 on it; your utilization is 95%. High utilization can count against you because creditors use it as a gauge to see how likely you are to pay back what you owe.

You can also try to add to your credit limit and pay down debt at the same time to make your debt-to-credit ratio smaller.

Don’t close old accounts

So, how does credit work when it comes to your old credit accounts? Your credit card accounts make up a vital part of your credit history, so if you have accounts that show you’ve been paying your bills on time consistently, you’ll want to keep them as part of your credit history.

If you have accounts you’ve paid off, keep them open and make the occasional small purchase on them. Pay them off in full each month.

Monitor your credit

Many banks and credit card companies now provide free updated credit scores as well as daily credit monitoring. It’s worth looking into these services to stay on top of your credit score.

Maintaining your credit score

Once you finally get to a point where your credit is good, how do you ensure you stay there? By maintaining your score. Here’s how:

Pay off and avoid debt

Paying off debt shows your creditors that you are financially responsible, and avoiding it as a whole (especially credit cards) will give you fewer bills to pay each month. It will also allow you to focus on what really matters – building wealth.

So learn how to pay off credit cards fast and use your debit card for purchases.

Build an emergency fund

Your emergency fund is essentially your backup plan in the event the unplanned occurs. Having one means you won’t have to rely on debt to resolve your situation, which in turn means you can keep your credit utilization ratio low.

Save for retirement

Just like with having an emergency fund, over the long term, saving for retirement reduces and hopefully eliminates any reliance you have on debt. A solid nest egg for your future self means you won’t need to finance the costs of your lifestyle come retirement.

So consider different tips for retirement and start planning.

Check your credit frequently

Checking your credit frequently will inform you of what’s being reported, this way, you can take any necessary actions to rectify inaccuracies if they occur.

Apply a credit freeze

It’s also a good idea to establish a credit freeze that prevents the opening of new lines of credit in your name. It can help protect you from credit fraud. If you are not applying for a new line of credit or loan anytime soon, it’s definitely something to consider.

Find out more about the process if you’re wondering, should I freeze my credit?

These are all things you should be doing over the long term. Establishing good financial habits ensures you avoid scenarios that will impact your credit.

3 Common credit myths

Now that we’ve gone over the question of what is credit, plus some ways to build your credit and stay in good standing, let’s dispel some of the myths people commonly believe about their credit.

Having a thorough understanding of these incorrect assumptions will help you make sound financial choices.

There are a number of myths going around about how credit works, including:

Myth: Holding a credit card balance is good for your credit

Wrong! Carrying a balance isn’t a great idea. Not only will you owe money, but you will also be paying interest.

That means the price of whatever you paid for on credit will cost you more money every month that you carry a balance.

You should strive to pay your credit card bill in full and on time every month to build and protect your credit score.

Myth: Checking your credit report will reduce your credit score

If you are applying for loans or lines of credit, there will likely be hard inquiries made on your credit report.

A hard inquiry for credit card applications or credit checks can cause a temporary dip in your score, but soft inquiries such as checking your credit score through credit monitoring tools will not impact your score.

Myth: Once a credit score is bad, it can’t be rebuilt

Your credit can be rebuilt over time if you focus on developing good credit habits and working through the issues on your credit report.

Things like paying your bills on time and in full, coming to agreements with collection agencies for any accounts that are delinquent, getting consumer credit counseling or coaching, etc., are all steps you can take towards rebuilding your credit.

What is a simple definition of credit?

A simple definition of credit is being able to borrow to pay for things and then pay it back at a later time. So your credit cards and any loans you obtain are all considered credit.

You can use credit for many good things e.g. to purchase an asset like a home that has the potential to appreciate. But that said, because you are borrowing money, it is a potential debt that has to be paid back, so you should use it with caution and with a plan.

What is a good credit score?

The general consensus is that a good credit score is 700 or higher. With a credit score like this, you’ll likely get approval for a loan at a good interest rate. An excellent credit score, on the other hand, is about 800 and higher.

How does credit build up?

Credit builds up over time and with good credit behavior. Paying off your debts on time, keeping accounts open, your credit mix, and other factors can help build up your credit.

It takes time and patience to build your score, so don’t expect overnight results.

However, you can consistently take steps to improve your score and make good money moves.

Is credit the money you owe?

Credit isn’t the money you owe, it’s the amount you can borrow and will need to pay back. Credit, however, has the potential to become money you owe, but only if you use it.

For instance, if you have a credit card that you can spend $5,000 on, then you have $5,000 worth of credit. But if you use some of it, then there is less that you can borrow.

What builds your credit score the most?

Your payment history over time builds your credit score the most. That said, there are many factors that contribute to credit.

FICO suggests keeping credit accounts open, using a low percentage of the credit available to you, and not trying to get too much new credit to start.

Articles related to the best way to build credit

If you enjoyed learning about how credit scores and credit works, then you’ll like these other blog posts!

• 27 Tips For How To Pay Off Credit Cards Fast
• The Advantages And Disadvantages Of Credit Cards
• Why Did My Credit Score Drop?
• How Do Credit Card Companies Make Money?
• Can You Pay A Credit Card With A Credit Card?

Learning how credit works can benefit you financially!

So, now that you know how does credit work, remember you should use credit wisely and to your advantage. That means using it to obtain a home loan, get a cell phone, sign a lease for an apartment, or for business financing (with a solid business plan).

Don’t use it to rack up credit card debt, which, over the long term, is to your disadvantage. Learn more about building good credit with our free course!

The post How Does Credit Work? Here’s What You Need To Know appeared first on Clever Girl Finance.

Pre-approved credit cards are one way that credit card companies attract new customers. These offers are typically sent by mail to potential cardholders who meet some minimum criteria for approval.

If you’ve ever received one of these offers, you may be wondering how it impacts your credit score. Or perhaps you are wondering what to do next. But first off, what does pre-approved for a credit card actually mean? Unsure what it means to be pre-approved or what to do if you are pre-approved? Keep reading!

What does pre-approved for a credit card mean for you?

Being pre-approved for a credit card means that based on certain criteria, you are likely to be approved for a credit card if you were to apply. This may also be referred to as pre-qualification. However it is not a guarantee.

In most cases, it simply means you have a minimum credit score and a good credit history. Sometimes the issuer asks you for more information such as pay stubs or annual income. You will still have to go about completing that application process to be approved for the advertised credit card.

Additionally, in most cases, a pre-approval is simply a form of promotional and marketing material. The purpose is to encourage you to apply for the credit card that is being offered. In some cases, you may be offered specific rewards for applying. It’s a tactic credit cards companies typically use to get new customers.

Keep in mind that getting a pre-approved credit card offer in the mail, by phone, or email does not mean that you have been fully-approved.

What is the difference between pre-qualified for a credit card and pre-approved for a credit card?

So what does a pre-approved for a credit card mean versus being pre-qualified? Pre-approved vs pre-qualified credit cards are often used interchangeably but they do have one slight difference.

Pre-approval credit card offers

A pre-approval offer is initiated by the credit card company e.g. American Express, Discover, Bank of America, Chase etc.  When you’re pre-approved for a credit card, it typically means that the credit card company has reviewed your credit history and financial information in more detail and has determined that you meet their criteria to apply for the card.

Pre-approval often involves a soft credit inquiry, which does not impact your credit score. However, the issuer may still perform a hard credit inquiry when you formally apply for the card. In some cases they may run a hard inquirary on your credit score. They may also ask for additional information about your financial situation, such as your pay stubs or W-2 statements.

Pre-approved offers are more likely to result in an actual approval when you submit an application. However, they are still not a guarantee.

Pre-qualified credit card offers

Contrarily, a pre-qualified offer is an earlier step in the screening process. A pre-qualified offer is usually based on even more limited information about your credit profile, but does not involve a hard credit inquiry or other financial information.

When you’re pre-qualified for a credit card, it means that the credit card company believes you may be eligible for their card based on the information they have. That said, it’s not a guarantee that you’ll be approved when you officially apply.

Now you know how to decipher what pre-approved vs pre-qualified means the next time one of these offers come your way.

Expert tip: Only apply for a credit card if you are ready

While getting an email or letter that says you are pre-approved for a credit can be exciting, don’t be swayed into getting a credit card unless it makes sense for your finances.

Even if a credit card offers a ton of rewards, it can still lead to a life of debt. If you do get a credit card, make sure you are responsible with it and pay it off in full each month to avoid getting into debt.
How to get pre-approved for credit card offers

Credit card issuers and other lenders have the ability to access information on your credit report in order to offer pre-approval to you.

Consumer reporting companies, or credit bureaus, provide a list of qualifying persons who meet the company’s requirements for pre-approval. Obtaining this information is considered a soft inquiry on your credit report.

In general, if you maintain a good credit score and have a good credit history, you’ll increase your approval odds. You don’t have to wait for an offer to be pre-approved for a credit card. Most credit card companies allow you to check to see if you are pre-approved for their credit cards by completing a brief application on their website.

By filling out a short form with your social security number, information about your income, employment, and financial obligations, you can quickly find out if you qualify.

A pre-approval offer isn’t necessary to apply for a credit card, though. You can simply apply for a card directly on a card issuer’s website.

Do credit card pre-approvals impact your credit score?

When a credit card issuer does a soft inquiry on your credit report to check for pre-approval, it does not negatively affect your credit score. These types of credit checks also do not lower your credit score. You will be able to see them in your credit history if you request your credit report from any of the three main credit reporting bureaus: Experian, Equifax, and Transunion.

However, when you actually apply for a credit card, a hard inquiry is made. This does lower your credit score. Because of this, you want to limit the number of hard inquiries made on your credit.

Before applying for a credit card, check to see if you are pre-approved on the card provider’s website. This will help you avoid having a hard inquiry that lowers your credit score for a card that you don’t qualify for.

What to do if you get pre-approved for a credit card

If you get pre-approved for a credit card, the first thing that you should do is decide if a credit card is right for you.

You may not have been thinking of applying for a credit card prior to receiving the promotion, so don’t feel pressured to apply. If a new credit card isn’t right for your financial situation, simply toss the offer away (securely). There are many advantages and disadvantages of credit cards, so make sure it makes sense for you before you apply.

If you are in the market for a new credit card, follow the instructions provided in the offer to apply. Remember, applying requires a hard inquiry on your credit. So be sure that you are truly interested in applying.

What to consider before applying for a credit card

A credit card can be a big financial commitment. Before applying for one, there are a few things that you need to take into consideration.

Interest rates

The annual percentage rate (APR) is the interest rate that you will pay on any balance that you carry from month to month. The higher the rate, the more money you’ll have to pay above your principal balance amount.

Credit card interest rates can get extremely high, so it’s important that you know this rate before applying for a card.

Fees

Some credit card companies charge annual fees, foreign transaction fees, and late fees. These are charges that you should be aware of and prepared for as a potential cardholder.

You don’t want to be blindsided by additional fees on your bill. Take the time to review these fees beforehand so that you can learn how to avoid them.

Rewards

Credit card companies are always competing on incentives to attract new customers. Some offer cash back incentives, while others may offer travel points. Look up the different rewards offered by the credit card company.

Take these into consideration when you’re deciding which credit card offer to apply for. Ideally, you’ll want to apply for a card with rewards that are advantageous to you.

Your current debt load

A credit card should always be handled responsibly. Without a solid financial plan to manage your money, you can easily find yourself in mounds of credit card debt.

If you already have a significant amount of debt, applying for a credit card may not be the best option for you. Instead, work to pay off your debt first.

Does pre-approval mean you will get approved for a credit card?

Pre-approval for a credit card increases your likelihood of approval, but it doesn’t guarantee it. Pre-approval is based on a soft credit inquiry and preliminary information.

Final approval, on the other hand, depends on a more comprehensive assessment, including a potential hard credit inquiry and the credit card issuer’s discretion. Your financial situation can change between pre-approval and formal application, impacting the final decision.

Can you be denied a pre-approved credit card?

Yes, you can be denied a pre-approved credit card. Pre-approval is based on a preliminary assessment and soft credit inquiry, but the credit card issuer may still decline your formal application after conducting a more thorough review, including a hard credit inquiry. Factors like changes in your financial situation or discrepancies in your application can lead to a denial despite pre-approval.

Is getting pre-approved a good thing?

Getting pre-approved for a credit card is generally a good thing. It indicates that a credit card issuer believes you meet their initial criteria, increasing your likelihood of approval when you formally apply. However, it’s not a guarantee of final approval. You should still consider factors like interest rates, the annual fee, and any rewards before deciding to accept the offer.

Will accepting a pre-approved credit card hurt my credit score?

Accepting a pre-approved credit card normally include a soft credit check, which does not hurt your credit score. However, in some cases, it can involve a hard credit inquiry.

A hard inquiry can temporarily lower your credit score by a few points. However, this impact is usually minor and can be offset by responsible credit card usage over time.

More articles related to credit

Found this article on what pre-approved for a credit card means? Check out this related content!

• Does Checking Your Credit Score Lower It?
• Does Refinancing Your Car Hurt Credit?
• How To Use Credit Cards Wisely
• 27 Tips For How To Pay Off Credit Cards Fast

Make smart choices if you are pre-approved for a credit card

Now that you know what pre-approved means for a credit card, you can figure out your next steps. Remember that getting pre-approved for a credit card does not guarantee that you will be approved. It also doesn’t mean that you even need to apply. It is simply an offer to apply that you can choose to accept or decline.

If you no longer want to receive these offers, you have the legal right to opt out of this marketing at OptOutPrescreen.com. Note that it can take up to 60 days before you stop receiving these offers.

Ultimately, credit cards can be used responsibly to build your credit. If you’re interested in learning more about building or improving your credit, enroll in our free credit course!

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