Pre-approved for a credit card?

The glossy envelope lands on the mat with the rest of the post. "You have been pre-approved for the XYZ credit card!" How flattering is that? You are so highly regarded as a potential customer that the credit card issuer has picked you out for special treatment.

Well, not exactly. In the UK it is not possible to be "pre-approved" for credit by a company with which you have no relationship. At the very least the company would have to undertake identity and residence checks to establish that you are who you say you are, and it will also want to do a credit check.

These checks cannot be carried out without your permission, so to say you have been "pre-approved" for credit is stretching the imagination, as well as being economical with the actualité. "Selected by postcode from a list supplied by a list-broker" is a more likely explanation - and the credit card company will always reserve the right to turn you down if you do not meet its application requirements.

If you do have a relationship with a company and your name has been picked out from its database, you might also wonder why you have been singled out for a special offer. As always, read the small print in the literature carefully.

That credit card with the juicy extra credit limit is probably carrying a higher interest rate than the one you already hold, or, in the worst case, it might actually charge you a fee for bells and whistles that you don't need. In any case, you should always compare any offer that comes through the door with what else is available in the market place.

Credit where it is due?

But let's say the offer in the brochure on the mat looks like an attractive one and you want to go ahead. So, what are credit card companies looking for? The credit card industry has just launched its own advice website www.choosingandusing.com, to explain how credit cards work and to give consumers a better understanding of the risks of borrowing.

It explains how the credit card companies use credit reference agencies that hold data about customers, including information such as changes of address, past payment records and debt defaults. The lenders allocate plus and minus marks for each of the features they look at, and when they have added them all up the final result allows them to make judgments about you and your ability to pay. This is known as your credit score. You can check your credit score through Moneyextra with CreditExpert from Experian.

Information the lenders look at will include: How frequently you have applied for (and received) additional credit.How much you are already borrowing.Whether you pay your debts on time.Whether there is evidence of you not paying what you owe.Whether you can afford the extra credit.

More information on credit records and credit scoring is also available on the British Bankers Association website.

What the credit card companies don't usually say is that, if you are too financially well-behaved, you may be refused credit, just as you would be if you were financially irresponsible. For instance, if you have never had credit before, and have always managed your bills on a day-to-day basis, you will have no credit record and may be refused a credit card or loan for that reason.

Equally, if you always pay your credit card bill in full each month, you may also be refused because the credit card company - which wants to make money out of you, after all - may feel that you are a bad customer by its definition, because you are unlikely to pay any interest. But, don't despair. You might be accepted by another lender which uses different criteria. Each lender has different lending policies and scoring systems, and so applications may well be assessed differently.

Beware of mass marketing tricks

In truth, being "pre-approved" or "pre-selected" for credit is not only a waste of time, it can also be a hazard. This marketing trick is most generally used by companies looking for a soft touch - people who will be easily beguiled by the glossy literature with dazzling headline rates and are not too inclined to read the small print in other words, not the sort of person who researches best buys carefully and is wary of catches.

In the worst case, being on the lists of marketers who mass-mail this sort of material can get you into trouble, because the ready-completed forms being sent to old addresses from out-of-date databases leave home-movers and people in homes of multiple occupation open to identity theft, as fraudsters scoop up the junk mail in communal halls and waste bins.

If you think you might be at risk in this way, contact the Mailing Preference Service and register to stop having unsolicited mail sent to your address. If you are really worried that you might be at risk of identity theft, you can also register with fraud prevention agency CIFAS.

Of course, there can be extremely good deals to be had from direct mailshots. If you have a good relationship with a company, it may be able to offer you preferential terms because it knows you are a reliable repayer, so it is always worth taking a minute or two to see what is on offer. But have a healthy degree of scepticism. Always shop around, and don't be taken in by junk mail flattery!

26 July 2005 © Moneyextra.com

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