Tuesday, November 9, 2010

What Does “Pre-Approved” Mean?

House shoppers get a lot of comfort from having a pre-approved mortgage. Knowing how much a bank will lend you removes one big worry from the process of finding the right home. In this context, “pre-approved” means that the bank took your relevant personal details and determined how much they would lend you. However, when it comes to credit card offers from the very same banks, “pre-approved” seems to mean something completely different.

According to this strongly-worded explanation, when it comes to credit card offers, “pre-approved” means “not yet approved” as opposed to “approved in advance”.

When yet another pre-approved credit card offer from RBC arrived in the mail, I decided to check just how pre-approved I really was. A footnote from the heading on RBC’s offer pointed me to some fine print on the back that explained what they mean by “pre-approved”:

“This pre-approved offer is based on the credit and financially related information the Royal Bank of Canada has about you.”

This certainly implies that I was approved in advance. A quick look at the application tends to support this interpretation; the only information RBC asked me to provide is

– Telephone numbers
– Birth date
– Employment Income
– Mortgage or rent payment

The application explains that my personal income must be more than $60,000 or my family income must be more than $100,000. So, I'm obviously not fully pre-approved. But the lack of any further questions implies at least a partial level of pre-approval.

To test this, I went to the RBC web site to check out the application that just anyone would have to fill in. The only additional questions on this application beyond the ones above were

– Years at current address
– Years with current employer

They don’t seem to care about assets and liabilities beyond house and mortgage. So, beyond what RBC was able to figure out from my address, it seems that my pre-approved status has little meaning. It would be nice to force banks to use the term “pre-approved” consistently between mortgages and credit cards, but this is likely too much to ask when it comes to marketing.

8 comments:

  1. I had always thought "pre-approved" often meant they ran a soft credit check on a large number of customers, then sent the offers to everybody above a certain score. If you take the pre-approval offer they don't run another credit check, but if you apply from scratch they run a hard credit inquiry.

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  2. To clarify: I meant pre-approval in the context of credit cards. The most important component of whether you get it--your credit score--has already been confirmed, now they only need your income and the large payment (rent) that might not be reflected in that score.

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  3. @Kurt: I guess the question is how soft that initial credit check is. Do you really think that they get credit scores for recipients of credit card offers when the response rate must be dismally low? This seems like it would be expensive.

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  4. Pre-approved is a gimmick. It really is a way of saying we'll dig through the paperwork quickly. It is the same with mortgages and credit cards.

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  5. @Drew Cassels: Are you saying that pre-approved mortgages aren't really pre-approved or are you saying that credit cards are essentially pre-approved? I've never heard of someone being pre-approved for a mortgage, but later turned down, but that doesn't mean it hasn't happened. I wouldn't count a case where the house buyer deliberately gave false information to get the pre-approval (not that I've heard of such a case either).

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  6. Years ago I got a pre-approved credit card from Amex. I had been working full time for a few years and was making good money for my age. I had no debt and paid all my bills on time. However I had no credit history. I applied for the card and got back a little saying Amex wouldn't give me a card. I sent a strongly worded letter to Amex and never heard from them since. I've since torn up everything from them that's sent to me.

    A friend's friend once worked as a CSR for Amex. He confirmed the pre-approved thing is bogus.

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  7. A mortgage broker told me that he could pre-approve me, but that it didn't really mean anything. Maybe it just gives home shopper's a conservative price range when they don't know how much they qualify for? Or it could be a mortgage broker has so many prospective lenders that it's impossible to pre-approve with every lender.

    Credit card pre-approval is probably just marketing, like Drew says. I had a friend who just finished university had a pre-approved credit offer rejected.

    On an odder note, a classmate in university was rejected for an Airmiles card. That surprised me.

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  8. @Lister: That's one data point supporting the idea that credit card pre-approval means little.

    @Gene: Perhaps mortgage pre-approval means different things depending on who gives it to you. I can see an individual mortgage broker's pre-approval may not mean much. Years ago I got mortgage pre-approval from a bank branch in the form of a signed certificate. The process I went through was fairly lengthy and I was warned that if any of the information I provided was untrue, the certificate would be revoked. Of course, the banking world may work differently now.

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