With so many types of credit cards, loans and other financial products out there, it can be hard to be certain which you'll actually be able to qualify for before you submit an application.
Many lenders allow borrowers to prequalify before they submit a formal application, potentially saving them time and hassle by providing a preliminary answer based on the applicant's information. Obtaining a prequalification isn't a guarantee you'll be approved, but it's a risk-free way to know if you should rule out that option and seek alternatives.
What Does Prequalification Mean?
The prequalification process can help a lender gauge your eligibility and possibly provide the interest rate or terms you might qualify for on a loan. You'll still have to submit a formal credit application, however, and prequalification doesn't guarantee that you'll be approved. Prequalification is a risk-free way to help you gauge if you are likely to be approved and if an application is worth pursuing.
When you complete a formal application for a credit card or loan, lenders typically take a look at your credit report. Credit checks associated with applications for credit result in what's called a hard inquiry. These inquiries are noted on your credit report and can temporarily ding your credit score by a few points.
If you want to get interest rate quotes from lenders, or you don't want to face a hard inquiry only to be rejected, prequalification is a way to get that done. With prequalification, you'll provide a lender some information and they'll take a quick look at your credit report—usually as a soft inquiry. Unlike a hard inquiry, this doesn't impact your credit score.
If prequalification tells you approval is unlikely, it will at least save you from the time-consuming process of completing a full application and pulling together documentation—and you'll avoid a hard inquiry on your credit report.
Prequalified vs. Preapproved
It's easy to confuse prequalification with preapproval, especially since credit card issuers often use the terms interchangeably.
Some credit card issuers offer online prequalification, though some call it preapproval. If you receive a credit card offer in the mail saying you've been preapproved, it means you've been prescreened with a soft inquiry but will still need to apply and have a full credit check to actually be approved.
However, with loans, such as mortgages and auto loans, the processes of prequalification and preapproval are different in a few key ways.
Prequalification entails a basic review of your creditworthiness, and you may be asked to provide some other financial information without submitting documentation. Based on this view, lenders can determine if you're likely to qualify. Once you submit a full application and your finances are more closely reviewed and verified, the lender can make a final determination.
When it comes to loans, especially mortgages, your first step may instead be preapproval. In this process, you'll submit documentation, such as bank statements, tax returns and proof of income. The lender will then verify your finances and run a full credit check, which creates a hard inquiry. If you're successfully preapproved, you'll likely have a much better chance of getting approved upon application.
How to Get Prequalified
Getting prequalified for credit is often quick and easy since you're only providing a few pieces of information to get a preliminary answer and terms, with no commitment from you or the lender. While some lenders may still offer prequalification in person or by phone, most now offer a convenient online prequalification option.
Getting Prequalified for Credit Cards
To get prequalified for credit cards, one strategy is to visit the website of the credit card issuer you're interested in. Some issuers let you prequalify for a specific card, while others have tools that let you input some basic details and find out which of their cards you're likely eligible to get.
You can also check your mailbox for preapproved offers, since they mean you've already been pre-screened.
If you're not set on a certain card or issuer, another option is to use an aggregator, such as Experian's free comparison tool. This free tool matches you with prequalified credit card offers that are personalized to your credit profile.
Getting Prequalified for Mortgages
As you start the mortgage process, you may want to get quotes from a few different lenders to get a general idea of how much you can borrow and to find the best interest rate. Getting prequalified for a mortgage is an easy way to do this since you don't have to go digging for all of your documents just yet, and there's no hard inquiry on your credit report.
It's usually most convenient to visit the websites of the mortgage lenders you're interested in and fill out their prequalification form, which will ask some basic financial details and credit history. You might be able to do this by phone or in person if you prefer.
Once you are prequalified, you'll be told how much you're likely able to borrow, along with potential loan terms such as the interest rate. Again, this doesn't guarantee you'll be approved in the end, but it informs you whether it's an option worth pursuing. It also allows you to compare offerings and go with a lender offering the best terms.
Once you decide which lender to use, you'll go through the more rigorous preapproval process. You'll be asked to provide significant documentation for verification and undergo a full credit check. If you're preapproved, it means you can lock in that deal and make an offer on a home, knowing your loan is likely to be approved once you complete the application.
Getting Prequalified for Other Loans
The process of getting prequalified for a loan other than a mortgage is somewhat similar. You can fill out a prequalification form on a lender's website.
You can also use Experian's free comparison tool to see if you prequalify for a variety of personal loans (though not mortgages).
Similar to prequalifying for a mortgage, this process of prequalifying for a loan allows you to compare quotes from multiple lenders without any impact to your credit. Then, once you've chosen the lender you'll use, you can complete the full application knowing chances are good you'll be approved.
The Bottom Line
While lenders look at a variety of factors to determine your eligibility for loans and credit cards, such as your income and assets, your credit score and history are among the most important.
Some lenders advertise their minimum credit score required for qualification. If you haven't checked your credit lately, even if you have gotten prequalified for a loan or credit card, it's smart to get your free credit report from Experian before you submit a full application.
This gives you a chance to see where your credit stands and whether you're likely to be approved. This quick move will save you from the time and headache of completing a full application and getting a hard inquiry on your credit report.