The Risks of Responding to Pre-Approved Credit Card Offers

Several colleagues and friends noticed they have recently started getting more credit card offers in the mail and that the offer terms are very attractive. Some examples include 0% interest on all charges for the first 12 months, a waiver of the balance transfer fee, larger reward perks and annual fee waivers — for the first year at least.

While mail volume for preapproved credit cards offers is increasing, the card issuers remain very conservative with their risk criteria for the most part. That means that only those with higher credit scores are likely to be getting offers. Since the very low risk population (people with highest scores) tend to not respond to credit card offers, the banks are making the offers as attractive as possible to try and entice a response.

So, if you happen to be one of selected getting these offers, should you take advantage of these offers and if you do, how will it impact your credit score?

The impact on your credit score will depend on the information reported with the new credit card and on the other information in your credit report. Some points will likely be lost in the time in file category of the score as there is now a new credit obligation on the credit report where you have yet to demonstrate you can manage it wisely over time. A quick build up of several new credit obligations over a short time can have a more substantial impact. So think twice before trying to open several cards in a short period of time. The credit check the lender does when you respond to an offer could have a small impact as well.

The other area that could be affected is the level of credit indebtedness. If the addition of the new card decreases your revolving utilization (sum of your revolving credit balances/sum of your revolving credit limits) it could result in additional points as you now appear less credit indebted. The opposite is true as well: the revolving utilization can increase if you close down a credit card. For example, if you close down the newly opened credit card next year when the $50 annual fee (waived in year one in now due in year two), then your score could take a hit.

Generally speaking, the periodic opening of a new credit card by a consumer with a high credit score will likely have a relatively small impact on the score. A hypothetical 15 point decrease has less material impact when the starting score is 785 versus a 700, but a large build up of a lot of new card openings would likely have more substantial impact.

So be selective in your quest to take advantage of the credit card offer enticements.

Image: 401k, via Flickr