A recent study suggests that credit card lenders are increasingly using pre-approved mailings to try and gain new business, but there are risks that come with responding to such unsolicited offers.
As more and more credit card lenders compete to gain new customers, there has been a large increase in the number of unsolicited credit card offers being sent out in the mail.
These ‘pre-approved’ offers often try to tempt consumers with attractive introductory rates and welcome offers. Some of the most common examples are zero percent interest for the first 12 month on both purchases and balance transfers, increased rates of earnings for reward points and annual fee waivers.
Even although the number of these pre-approved mailings is on the increase, credit card lenders are still being fairly conservative when it comes to managing the risk area of their accounts. This means that only consumers with a good to excellent credit rating are likely to be receiving these offers on a regular basis. This is the low risk market which is not usually inclined to respond to such unsolicited offers, but the banks are pulling no punches in attempting to snag new customers by offering increasingly generous introductory offers and welcome bonuses.
With such attractive offers, it is easy to be tempted to go ahead and respond, but often consumers do so without considering the impact that it may have on their credit score. It is entirely possible that on responding to such offers a consumer may lose points on their credit rating in the time area of the report.
This is because there is now a new payment obligation on your file and you have not yet been able to demonstrate that you are capable of managing it in a responsible fashion. If you were to accept several of the pre-approved credit card offers, there would be a substantial impact on your credit scoring as the accumulation of several new credit accounts in a short time period is seen as a credit risk. This is not to suggest you must never respond to these pre-approved offers, but consumers should definitely exercise caution in choosing which offers to respond to. It is also important to keep in mind that the credit check performed by the lender when you respond also goes on record and can impact your credit scoring.
The level of indebtedness you currently have can also have an affect on your credit rating when responding to a pre-approved credit card application. If opening the new credit card account effectively reduces your revolving utilization then you may end up with a few additional points as you appear to be less indebted. Revolving utilization is the total sum of your credit balance divided by your revolving credit limit, or in short, the amount of your credit limit that is currently being used up. So it may sometimes be advantageous to occasionally take up such pre-approved credit card offers.
However, this credit rating fluctuation also works the other way. If you were to close down a credit card, then your revolving utilization figure would be larger and would negatively impact your credit score. For example, you might wish to take up a pre-approved offer for a credit card account offering interest free credit for 12 months and a waiver of the $150 annual fee in the first year. However, after that year is up, you then close the account, to avoid paying the fee. This will have the effect of raising your credit utilization figure meaning that your credit score would likely take some damage.
Overall, if you have a relatively high credit score, then the occasional opening or closing of credit accounts will have just a small impact on your score. However, the lower your starting score the more impact a 15 point fluctuation can have. It is important for consumers to be selective when looking at pre-approved credit card offers and not be drawn in by attractive bonuses.