Pre-Qualification: What it Means, Special Considerations

What Is Pre-Qualification?

The term pre-qualification refers to an estimate for credit given by a lender based on information provided by a borrower. Pre-qualifications are conditional and involve the lender reviewing a borrower's creditworthiness before granting a pre-approval. Lenders generally use this as a marketing tactic for creditors seeking to obtain new customers, especially for things like credit cards and mortgages.

How Pre-Qualifications Work

Pre-qualifications are popular marketing tactics used by many creditors to entice new and existing customers to apply for credit products such as loans, credit cards, and mortgages. In most cases, pre-qualifications are unsolicited offers for credit. This process gives these consumers some preferential access in a credit application.

Lenders use existing information provided by consumers. This may be from data provided in a previous application or because the consumer is already a customer. Creditors also have multiple relationships with credit agencies that allow them to target certain types of borrowers and obtain soft credit inquiries for pre-qualification. Soft inquiries don't affect an individual's credit score. Creditors generally target borrowers by their credit history. Relationships with credit agencies allow creditors to obtain lists of potential borrowers in their target score range and to pull soft credit inquiries for determining pre-qualification offers.

Potential borrowers may receive a phone call or a letter in the mail offering a pre-qualification for a specific amount for a certain credit product. If interested, the consumer can contact the creditors to proceed with the application. This can help increase a borrower's chances of acceptance.

If a borrower doesn't receive a pre-qualification offer, there are a few resources they can turn to for understanding if they may be pre-approved. Many creditors offer a pre-qualification tool that allows a borrower to obtain a pre-approval with a soft inquiry that does not affect their credit score. CreditCards.com is one source for obtaining these offers. Its credit matching tool provides free pre-qualifications from multiple credit providers allowing a borrower to compare products across issuers. Credit monitoring sites like Credit Karma also offer pre-qualifications based on consumers' credit histories.

Special Considerations

Since pre-qualifications are conditional offers, they don't necessarily guarantee that a financial institution will issue someone that amount of credit or any credit at all. Pre-qualification offers are simply estimates and marketing documents that can help a credit issuer obtain new customers. If a borrower decides to apply for a pre-approved deal, the creditor still needs to obtain a hard inquiry on their credit report. This provides the lender with more comprehensive information on whether the customer actually qualifies and, if accepted, how much the creditor will lend.

Borrowers need to have a good understanding of their credit score and credit profile. Numerous credit inquiries and rejections can have a significant negative effect on a borrower’s credit score, decreasing their eligibility for obtaining credit in the future.

Pre-Qualification vs. Pre-Approval

Pre-qualification and pre-approval are unique to the credit industry. They can be a successful and profitable marketing tactic that attracts customers through direct mail in the form of either letters or emails. While they may seem similar, there are certain differences between the two.

While a pre-qualification is normally the first step in the credit marketing process, a pre-approval is the second step in the lending process. The former indicates creditworthiness, while the latter provides the borrower with a more definite answer. Lenders require consumers to fill out a credit application in order to get a pre-approval and may provide a certain credit limit after doing a review of the borrower's financial history. In most cases, the lender provides consumers with a conditional commitment. So if a borrower has a mortgage pre-approval in hand, they can begin shopping for a home that fits into that price range.