Why Preapproved Credit Cards Are Almost Always A Bad Idea According to Trout Associates

Most people are familiar with the idea of getting credit card offers in the mail. What many people may not be aware of, however, is the difference between pre-screened offers and pre-approved offers. While there are a number of perfectly legitimate credit card companies that send pre-screened offers to potential customers, it is important to be very wary of pre-approved offers.

THE IMPORTANCE OF YOUR CREDIT REPORT AND SCORE

Lenders are not allowed to actually pull your credit report and/ or view your credit score until you actually apply for a credit card. If you have very good credit, you will most likely be offered a low interest rate as well as no annual fee. If you have fair credit, you might be offered a card with a slightly higher interest rate, but you will still most likely not have to pay an annual fee. If you have poor credit, however, you may only qualify for a credit card with a high interest rate and an annual fee.

Whenever lenders extend credit, they are taking a risk that you will not pay it back. Your credit score and credit report tell lenders how responsibly you manage the credit you already have. If you have a good history of paying your bills on time, not borrowing more than you can afford to pay back and not using all of the credit that you have available to you, then you are considered a low-risk borrower. In that case, lenders will probably offer you very attractive terms and rates on credit cards and loans because they have a high degree of confidence you will pay the loan back and not default on the loan.

If you have a less than stellar borrowing history, however, creditors are taking a higher risk offering you loans or lines of credit. As a result, they will “charge” you more for the loan in the form of higher interest rates. If your credit history is extremely poor, they will even charge you fees on top of a high interest rate to offset the risk they are taking in even extending you credit in the first place. Until you actually apply for the card, however, they don’t know what your credit looks like or what your credit score is. This is why there is a major difference between pre-screened and pre-approved.

WHY PRE-APPROVED OFFERS ARE GENERALLY A BAD IDEA

Pre-approved offers mean lenders are offering to extend you a line of credit without ever getting a look at your credit history, credit score or credit report. In some cases, you may get a pre-approved offer because you have stellar credit. If your credit is not stellar, however, pre-approved offers generally come more often than not from predatory lenders.

 Pre-approved offers generally offer the least favorable terms possible, to offset the creditor’s risk in extending credit. Not only do they generally carry high interest rates and high annual fees, they also generally have very small credit lines. In some cases, they may even have a number of other fees in addition to annual fees, all of which come out of the line of credit.

For instance, a card may offer only a $300 credit line but come with as much as a $125 annual fee. Some creditors may even charge monthly “maintenance fees” or other types of fees, in addition to having a high interest rate. If you accept the offer, you may only have as little as $125 left in actual credit, but you are still responsible for paying off the entire balance. The other thing to keep in mind is that the annual fee is charged immediately, which means it also starts immediately collecting interest. The longer it takes you to pay off that initial annual fee, the more it ends up being.

When your finances are already shaky, accepting an offer for a pre-approved credit card can often take a bad situation and make it even worse. Instead of getting a much-needed infusion of credit, you instead just get more debt. Pre-approved credit cards are almost never the solution to a bad financial situation. There are many other, much more effective, ways of getting out of debt or managing a financial crisis. Debt consolidation is one such option, which Trout Associates can help with.

If your credit needs some help, there are a number of different options to help you get it in shape. Cleaning up your credit can take some time, but it is always better than accepting pre-approved credit offers with ridiculous credit terms. If you are already deeply in debt, there are better ways to minimize and manage your debt rather than just piling more on. Trout Associates are debt management experts that can help you climb out of debt rather than just sinking deeper into it.