Who has not received a "pre-approved" credit card solicitation
in the mail? Most of you probably receive a few solicitations each
Competition among credit card issuers is fierce, resulting in better
credit accessibility and more choices for consumers. Given these
factors, each current or potential credit card borrower should be
evaluating (or re-evaluating) the available options. Whether you
are looking for your first credit card or evaluating the suitability
of a current credit card, you need to educate yourself.
If you receive a pre-approved credit card solicitation, the credit
card issuer has already decided to issue you a credit card, if you
meet its established criteria. Now, you need to decide whether to
accept the offer. First, you need to evaluate how you will use the
credit card. Second, you need to read the entire solicitation, including
the fine print, very closely. The solicitation will provide you
with valuable information to determine whether the credit card is
suitable for you. Finally, evaluate your own creditworthiness. If
you have sufficient income and a good credit history, you might
be able to negotiate a lower rate or annual fee.
Shop, shop, shop!
Before you decide to accept a pre-approved credit card offer, you
should shop around to make sure you get a credit card that suits
your needs. Credit card terms and conditions vary considerably.
To make your comparison shopping as effective as possible, you
need to consider how you use a credit card. Do you pay your credit
card bills in full each month? Do you always have a balance due?
Do you use the cash advance feature? Do you require any special
terms or features?
Once you have identified your needs, you can start shopping for
the appropriate credit card.
What's in the fine print?
Just as credit card terms and conditions vary, so do the pre-approved
credit card disclosure forms. Fortunately, a federal regulation,
Regulation Z—Truth in Lending Act, requires all consumer credit
card issuers to disclose, in writing, certain types of information
using similar terminology.
In addition to requiring the use of similar terminology, Regulation
Z also requires credit card issuers to make certain important disclosures
in a similar format. You simply need to read the disclosure forms
and understand the terminology to do your comparison shopping.
You will find the following disclosures on credit card solicitations,
including pre-approved solicitations, and applications. With the
exception of the last two items, each of the following disclosures
must be disclosed in a table format.
- Annual percentage rate.The annual percentage rate (APR)
is the cost of credit, expressed as a yearly rate. For most credit
card plans, the credit card issuer has the right to change the
APR; these are variable-rate plans. Credit card issuers are required
to disclose whether the APR may vary and how it is determined.
If you are not the type of borrower who always pays your credit
card balances in full, the APR will be particularly important.
You will want to find a card with the lowest possible APR.
On the other hand, if you pay your credit card balances in full,
the APR may be less important to you than other types of fees,
such as the annual fee and transaction fees, and features, such
as grace periods.
- Balance computation method for finance charge calculations.
The balance computation method determines the balance that the
credit card issuer will use to calculate your periodic finance
charge: the interest you must pay each month.
There are four common balance-computation methods. The average
daily balance method is used by most credit card issuers. The
adjusted balance method, where the current purchases are not included
in the balance until the following billing cycle, is the method
typically most favorable to consumers. Other common methods use
the previous balance or the previous two balances.
- The minimum finance chargeis any fixed or minimum finance
charge that the issuer can charge during a billing cycle.
- The grace periodis the period during which you can avoid
a finance charge by paying your balance in full. If you carry
a balance from month to month, there is typically no grace period
on new purchases. If you pay your balances in full, the grace
period will be an important feature for you.
- Issuance or availability fees.Some credit cards charge
approval, opening and/or annual membership fees for participating
in the credit card plan. If you pay your credit card balances
in full, you should be more interested in finding a credit card
plan with a low annual fee than a low APR.
- Transaction fees.Many credit card issuers charge fees
for certain types of transactions, such as cash advances.
- Other charges.Some credit card issuers charge other
fees, such as application fees, late-payment fees, or exceeding-the-credit-limit
Again, it is important to read the disclosures to do your comparison
shopping. Once you decide to accept a pre-approved credit card solicitation
or have an application approved by a credit card issuer, your understanding
of the terms and conditions of the credit card plan should prevent
any surprises once you receive the credit card.
Making sense of the terminology
Despite the disclosure requirements of Regulation Z, credit card
solicitations can be confusing. Below, you will find some disclosure
issues and practices that often cause confusion among consumers.
- Introductory or discounted interest rates.Some credit
card issuers offer low introductory interest rates. Most introductory
rates last for a short period, such as six months, and then the
credit card issuer increases the interest rate on your credit
card plan. Typically, when the introductory period expires, your
entire outstanding balance (as opposed to just new purchases)
will be subject to the higher finance charge. Sometimes the introductory
fee only applies to certain types of transactions, such as new
purchases or rollover balances.
Even if the credit card issuer initially offers you an introductory
or discounted interest rate, it must disclose the APR that would
otherwise apply to the account. For a fixed-rate account, it must
disclose the rate that will apply after the introductory rate
expires. In a variable-rate account, the card issuer must disclose
a rate based on the index or formula applicable to the account.
- "Pre-approved" versus "pre-qualified"
offers.A pre-approved offer generally requires only your
acceptance, typically in writing, but sometimes only verbal, of
A pre-qualified offer differs from a pre-approved offer; it simply
means that you have been selected to apply for the credit card.
The creditor in a pre-qualified offer typically has not reviewed
any information about you or your credit history.
The provisions of the Fair Credit Reporting Act make it even harder
to determine if an offer is truly a pre-approved offer. This act
specifically allows a lender offering a pre-approved card to verify
that you meet the issuer's criteria after acceptance. The issuer
is not required to disclose that they will re-verify your status
or employment. So, even with a pre-approved solicitation, you
can be rejected if there have been changes in your financial picture.
- Pre-approved "up to" a specified credit limit.
Many pre-approved credit card solicitations will state that you
may qualify for credit "up to" a certain credit limit.
Once you respond to the solicitation, the credit card issuer will
review your credit history to determine your credit limit, which
might be significantly less than what you expect based on the
- High fees.Sometimes credit card issuers disclose and
assess high up-front fees. These fees might include an annual
fee and a card reservation fee, among others. These fees can add
up quickly. Imagine your surprise if you were to receive a credit
card with a $300 credit limit with $150 in up-front fees charged
to your account before you even used the credit card. Fortunately,
all the fees must be disclosed, so be careful to read the entire
- Secured credit cards versus unsecured credit cards.Most
credit cards are unsecured lines of credit; however, some credit
card issuers offer secured credit cards. Typically, borrowers
with credit history problems will not qualify for unsecured credit
cards, making the secured credit cards an attractive option. Issuers
of secured credit cards require borrowers to deposit funds to
guarantee repayment of the credit card debt. The required deposit
usually equals the credit limit on the card, and issuers may pay
interest on the deposit. Most secured credit cards carry a higher
interest rate than unsecured credit cards.
- Cash advances.Most credit card issuers impose both finance
charges and transaction fees on cash advances. The finance charge
(interest) typically begins accruing from the date of the advance;
there generally is no grace period for cash advances. Further,
a transaction fee, sometimes as much as 2.5 percent of the transaction,
may be charged for the advance.
You should beware of solicitations and advertisements that state
"no finance charge" for cash advances. Since the term
finance charge only refers to interest, the issuer still might
charge a transaction fee for cash advances.
Further complicating your review of credit card solicitations is
the presence of unscrupulous lenders. Following are some potentially
unscrupulous practices that occasionally are encountered.
- Advance-fee or guaranteed loans.Some credit solicitations
or advertisements guarantee that you will get a loan, but require
you to pay a fee before you apply for the loan. If a solicitation
or advertisement guarantees you a loan, but requires you to pay
a fee before applying, there is a strong chance that the offer
is not legitimate. Most legitimate lenders will not guarantee
you a loan for a fee before receiving an application. Beware of
any offers of easy credit.
- "900" or "976" telephone numbers.
Some credit solicitations or advertisements state that you can
get more information by calling a "900" or "976"
telephone number. Some of the solicitations or advertisements
do not disclose the cost of these telephone calls; these are most
likely to be the offers that are not legitimate. You pay for these
telephone calls; sometimes the costs can be quite high. Further,
after making the telephone call, you may never receive the credit
Follow these rules
You need to be cautious when shopping for a credit card. To avoid
any surprises, remember a few simple rules.
First, if the offer seems too good to be true, it probably is not
Second, credit card issuers are required to disclose certain terms
and conditions at the time of application or when you are sent a
pre-approved credit card solicitation. Read the disclosures, including
the fine print, before accepting any pre-approved credit card solicitation.
Third, understand how you use a credit card in order to obtain
the most cost-effective credit card.
Finally, remember that competition among credit card issuers is
fierce and negotiating for a lower interest rate or annual fee might
Filing a complaint
If you have a problem with your bank regarding your credit
card, it is best to try to resolve the complaint directly
with the bank. If that is unsuccessful, you have the right
to file a complaint against the bank.
To file a complaint, you need to determine the bank's primary
federal regulator. If you have received a credit denial notice,
the name of the primary federal regulator must be printed
on the notice. If you do not have this information, you can
conduct an institution search at www.ffiec.gov/nicpubweb/nicweb/nichome.aspx
to determine the appropriate regulator to contact. Each regulator
has a consumer or customer assistance section to assist you
in filing your complaint.
For more information, contact:
Federal Deposit Insurance Corporation
Federal Reserve Board
Office of the Comptroller of the Currency
Office of Thrift Supervision
National Credit Union Administration
Federal Trade Commission