Preapproved Credit Cards for Dummies

It’s like Christmas in the mail. You open your mailbox and there, right in front of you, are preapproved card offers just awaiting your response. Are they too good to be true? Banks just don’t approve people in advance to get a line of credit, do they?  In a few short minutes you’ll know the answers to these and many more questions you may have.

What Are Pre Approved Credit Card Offers?

Preapproved credit cards are basically the offers to apply for a particular credit card that you receive in the mail.  Because banks or credit unions have a specific niche in mind when they send these out, chances are you fell into their target audience.  They will do analysis on customer base, coming up with data on which people are more likely to establish a line of credit with their company and which demographics are lacking.

For instance, let’s say that a credit card company did some market research and found out that 75% of their customers used their credit cards to shop for pet food and supplies.  In order to expand further into that market, the company would purchase a mailing list from a source like a pet lover’s magazine or members of PETA.  Figuring that these people would love pets and that their credit card holders love pets, the company would then send out pre approved credit card letters to all on that list.

How Do Preapproved Credit Cards Work?

The term itself is a bit misleading.  It’s not that you are automatically approved, it’s just that you’ve fallen into the company’s marketing crosshairs and have met a minimum requirement they’ve set.  Typically, this requirement is something like a certain credit score or initial deposit or some demographic indicators.

After a person receives a preapproved card offer he\she still needs to fill the application that is enclosed in the envelope and send it back to the bank. To your surprise the bank still have an option to decline your application despite the fact that you were preapproved.

To put it quite simply, the only thing you’ve really skipped is the choosing a credit card process.  The card is pre approved in a manner of speaking, but not in the manner in which people often believe.

Are these Offers So Good?

Besides the ease that comes with the credit card offer coming directly to you, preapproved credit cards can be good for a number of reasons:

• They are good for building a credit score.  If you haven’t had any credit before or are trying to improve your score, they can be a good way to do so by using it responsibly. Sometimes pre approved offers targeted specifically for bad or fair credit come into your mailbox right after your application was declined by another bank.
• They can have the same variety of advantages as all other credit cards – reward incentives, low interest rates, high limits, zero percent interest or just low APR, cash back programs.

In fact, one of the only drawbacks to preapproved credit cards is that it was not chosen by you – so it is always good to shop around to check if there are any better options for you in the market.  Since the cards still require an application and you can get a decline, you are not putting yourself at more risk applying for another card, if you chose it according to your credit score.

Identity theft in case of pre approved credit cards is not more likely than usual, because the application process goes in a regular way, and your card will be sent to you by mail not activated.

Why I’ m not getting Credit Card offering letters?

If you are not currently receiving offers in the mail, there are a few steps you can take to ensure that you’ll receive any offers you want.

• Obtain a credit rating.  You can do so with the government for free once per year or you can sign up with a company that tells you your credit score.
• Check the credit report for any erroneous charges.
• Dispute these charges with the three major credit unions.  They must remove them if they can’t prove them.  This will make you more likely to receive good offers.
• Visit the Opt Out Prescreen site Optoutprescreen.com, send and “opt in” request to receive offers and fill out any information required.
• Contact your bank or credit union and ask if they have any offers available that you may qualify for.

I Got Denied, Now What?

You have to be careful with credit card denials as they show up on your credit score.  If you gain too many of these negative marks against your credit rating, other companies will be more likely to deny your applications in the future.

To prevent this from happening, after one or two denials you should go through the steps mentioned in the section above about checking your credit score and then work on building better credit.

How Can I Increase My Credit Score?

There are a number of ways to improve your credit score:

• Be responsible with your credit cards; don’t overuse them but don’t let them rust
• Pay all bills on time
• Setup payment reminders
• Don’t open new accounts rapidly, but rather slowly and responsibly
• Pay down your debt
• Keep all balances low
• Purchase something with credit that you can pay down right away and then do so
• Visit a credit counselor

How do credit cards work?

Today credit cards became the essential and the most common way to perform money transactions between a customer and a merchant, but not all of the everyday credit cards users know how exactly it works from the inside.

A credit card is issued by the credit union or a bank for a particular individual. Credit card is connected to a revolving account and opens this person an access to a credit line with particular limit which is known as a credit limit. The size of the limit is usually determined by the type of the credit card, the person’s credit score and credit history. Credit limit is not a constant value – it is first defined when opening a credit card, but then it can be reviewed by the bank periodically based on the changes in credit score and the length of the relationships with the client.

Credit card is issued to be used in one of the leading multinational payment systems – Visa, Master Card, American Express, Discover, or a smaller national one. The actual plastic card will have a logo of the supported payment system on its face. Credit card processing companies provide services for merchants, from a small souvenir shop up to a big retailer, to enable them to accept credit cards of the international payment systems with an option to accept local payment systems (what is needed for example in a tourist areas).

Valid credit card should have a 16 digit credit card number, card holders name and valid date embossed on the face side. The reverse side has a CVV code that is used to confirm the possession of the credit card by the person who makes payments online (in “card not present” transactions).

How it works for the cardholder

Your credit card has a starting balance that is equal to zero – that means you do not have any debt. The highest amount of money you can use for spending is your available credit that is equal to credit limit. When you pay for a purchase or a service with a credit card, the transaction is processed by the processing company and your bank sends money to the merchant account. Your balance increases by the amount paid, and your available credit decreases by the same amount.  For example, you had a $1000 credit limit and 0 balance when you opened a credit card account. After you bought a $100 iPhone4, your available credit becomes $900 and your balance is now $100.

On the next month you will receive a credit card statement with all your spendings in the last month. Statement includes information about your previous balance, all transactions in the last month, fees and interest owed to a bank for the last month, your current balance and available credit.

Previous Balance – your Payments and Credits + Fees and Interest Charged + Transactions = New Balance

For our example shown above it will be: $0 –$0 + $0 + $100=$100

You should pay your new balance in full or at least do the minimum payment (also shown in the statement) towards to it till the due date– usually due date is 20-30 days after the billing. If you do not have a debt on your credit card (that means your previous balance is zero) you have a so called grace period before the due date when the interest will not be charged. After the end of the grace period bank starts to charge you the interest on your new balance. If you already have a balance, a new debt will be just added to your balance and the interest will be calculated on your increased debt. It is also a good habit to read your statement carefully to check if all the claimed transactions are real and no fraud transactions are included there.

If in the current month you spend all your available credit, you will not be able to use your credit card until you make a payment towards your balance that will unlock available credit. If you use your credit card regularly and usually do all the payments in time, the bank reviews your credit limit periodically (1-2 times a year) and can increase it. Average credit limit on the customer’s credit cards in the US is about $10 000, but for the new customer with not an excellent credit, a bank can make a starting credit limit of only $500-$1000.

If you fail to do a minimum payment (which is in average about 1% of the balance + all fees and interest and no less than $15-$35) on the due date you’re in trouble. A bank adds a late payment fee to your balance, information about late payment will be sent to credit agencies, your bank can raise your APR or even close your account.

Now the good news – credit cards often offer rewards in a form of cash back, flexible rewards or air miles options. Cash back is the option when the bank sends a certain percentage (usually 1-2%) of your monthly purchases of particular goods or services (e.g. all travel spendings or purchases in participating retailers) back to your account. Flexible rewards instead of cash back award you virtual points that you can later combine and spend in a selection of participating businesses. Air mile cards are often issued in partnerships with air carriers and award you a certain amount of virtual air miles for every dollar spend with your credit card. After you collect enough air miles you can exchange them to the air tickets according to the conversion rate.

Another good option for most credit cards on the US market is the benefits they offer e.g. rental car insurance and travel medical insurance. These options are free of charge and provide a customer with secondary car insurance when renting a car or a basic medical insurance when travelling abroad. Best credit cards for high earners offer additional benefits like 24/7 concierge service and personal travel agent.

How it works for the merchant

Merchants are provided with electronic devices to read credit cards – POS (Point of sales) and a service to accept electronic payments from the card holder’s account to the merchant bank account. Another old-fashioned way to receive credit card payments for a merchant is making a slip of a credit card with a valid credit card holder’s signature on the bill for the service or a purchase. Later these bills with slips are processed by the processing company and the money is transferred from credit card holder account to a merchant account. Today many alternative payment systems are offering convenient ways to collect payments and accept credit cards – for example PayPal, Square, Google Wallet and others. All these payment systems are competing for a share of the purchase or a service price that is collected from the merchant – a % of commission that stays for the system when the money is transferred from the card holder account to a merchant account. Average commission for a credit card processing for a “card is present” transactions (e.g. retail shop) is about 2%. It is even higher for businesses that use “card not present” transactions (online shop) and can reach 2.5%-3%. Simply put – all the goods and services are 2-3% more expensive because all the customers want to use credit cards. Because of the complicated commissions structure that includes a flat transaction fee and the % of the transaction, many small businesses do not accept credit cards for purchases less than a curtain amount (usually $3-$10). Some small businesses even use it as a selling point that they can offer lower prices because they do not accept credit cards.

Credit cards offer us a lot of convenience in our everyday life, but as any technology it involves certain risks for the customers who do not follow or just do not know the rules. First thing to start with a new credit card should be reading your credit card terms and conditions along with explanations of benefits – let it be your credit card bible or a bedside reading whatever is more important for you.

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We are also looking for the lowest interest rate credit card, but from year to year credit cards with low APR are becoming rarer. Low APR can be a big deal if you tend to carry high balance on your card. When you apply for a low rate credit card you must check whether it’s during introductory period only or it is regular APR.

While banks are trying to make more money in tough economy, credit cards with low APR are becoming available for people with excellent credit score only. If you suffer from bad credit history, the lowest APR is not for you. If you are looking for low rate cards check your local credit unions. The average credit union APR is lower than the banks one, but they don’t offer much rewards and not everyone can apply.

We’ve selected the lowest regular APR cards along with the longest introductory periods: Continue reading »

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