PREAPPROVED CREDIT CARDS

Most everyone has gotten a credit card offer in the mail that claims "you have been pre-approved to receive our credit card." It seems a little shifty that some faceless company is offering you unsolicited credit; but, still we are all tempted to fill out the application and await the arrival of the little plastic card that is our ticket to shopping happiness (until the bill arrives).  Before you get out the pen and begin filling out the paperwork, consider where it came from, what it is really offering, and what it is going to cost you.

WHAT ARE THEY AND WHERE DO THEY COME FROM?

Pre-approved credit cards are unsolicited offers sent to consumers to receive a credit card from a specific company.  Since you didn't request an application, you may wonder how an offer for a pre-approved credit card came addressed specifically to you.  There are three major credit bureaus that track consumers credit histories.  They are Trans Union, Equifax, and Experian. 

In order to stay competitive, credit card companies will offer credit to consumers that fit a model they have established.  Basically, they determine what type of consumer they want to target and then request a list of names from the credit bureau's databases that fit their parameters.  Then, they send out pre-approved offers to the consumers on the list hoping to hook a new creditor. 

Sometimes, credit card companies are looking for consumers with good credit scores hoping to lure them away from another company.  Other times they will target people with low credit scores with the hopes of enticing them to sign up for a pre-approved card with outrageously high fees and interest.  The hope is that a person desperate for a credit card will agree to severe costly terms. 

ARE THEY WORTH THE PAPER THEY ARE PRINTED ON?

The offer being sent is merely based on your name being pulled from a database because you met the credit card company's parameters. Also, by the time a pre-approved credit card offer has reached your doorstep it has been several months since your name was pulled from the credit bureau database and your financial situation could have changed.  All this means that a credit card would be foolhardy to simply offer you a credit card with no further information or investigation.  And, the credit card companies know this because the offer comes with an application and not a nice shiny new credit card. 

So, that pre-approved stamped on the envelope is not quite accurate.  It is more of an advertising ploy or gimmick.  Actually, a more accurate description would be "preliminary approval."  The credit card company has targeted you for an offer because you have meets some preliminary requirements they have to be a cardholder.  They now want you to fill out a detailed application and go through another credit screening to be sure your score hasn't drastically changed since they first got your name from the credit bureau database.  And, if you meet all the requirements of this second round and agree to the terms of their contract, you will be finally approved to receive their credit card.  If you don't mind being the target of their slightly deceptive advertising gimmick, then some of the offers you get may be reviewing. 

WHAT TO WATCH OUT FOR?

As enticing as these offers can seem, there are some things to watch out for.  You need to realistically consider why you got the offer?  If you have a good credit score and pay your bills on time, then you could be getting the offer because the company considers you a good candidate for their credit card.  In such a case, read offers looking for incentives and perks they will offer to entice you.  They may offer a lower interest rate or no interest on any balances you transfer from other cards.  They may offer rewards or cash back offers. 

On the other hand, if you have poor credit and a lot of debt, then they may try getting you to apply for a card with outrageous annual fees and huge interest rates and a very low credit limit.  In fact, some of these "pre-approved" offers have such high fees and such low credit limits that by the time they charge all the fees to your card you credit limit is down to $50 or less.  You will basically become a cash cow for the credit card company with no true benefits to you.  If you are honest with yourself about your credit status, then you can honestly evaluate the benefit of any pre-approved credit card.

LOW APR CREDIT CARDS

When shopping around for a credit card you need to be aware of what the card is going to cost you.  Obviously there is going to be a cost to you for using the credit card—otherwise the credit card company would not be in business.  Credit cards can sneak some pretty ridiculous fees into the small print of their contracts, so you should make it a habit to always read the entire document.  Also, be on the lookout for annual fees that can hit you for a loop if you are not cautious.  But, for now, let's examine the one cost that all credit cards have in common—the APR. 

All credit cards charge interest on any balance not paid in full when the bill arrives.  This interest rate is often referred to as the APR or the Annual Percentage Rate.  The percentage of interest charged is usually linked to the prime rate.  Credit cards can offer one of two rates to their customers.  They will offer a fixed rate that does not change from month to month or they will offer a variable rate that can change every month depending on how the market is doing.  You need to examine what type of rate a credit card is offering and determine which would be the best choice for you.  This can involve a little guesswork and even a bit of a gamble.  If you think interest rates are going to decrease, then you may want to gamble on a card with a variable rate, but, if the stress of such a gamble is too much for you, then just look for a card with a fixed interest rate. 

However, even a fixed rate credit card can change their interest rate. Keep in mind that if you are late in paying or go over your limit many fixed rate credit cards have clauses in the small print that allow them to increase your interest rate.  Also, be sure to check a credit card company's policy on changing their fixed rate. Some companies can change the rate whenever they want without giving you notice.  You will want to know how your interest rate is being calculated and the policy on giving notice of changes to avoid getting a huge, no so happy surprise on your monthly bill. 

While not specifically about the APR, another cost to you, if you intend to carry a balance from month to month, is how a credit card calculates its finance charges.  Most credit cards use an average daily balance. That is they total your daily balances and then divide the sum by the number of days in your billing cycle and base the finance charge on the final figure.  However, there are some credit cards that will divide the total of your daily balances by the number of days in two billing cycles which means higher finance charges.  While that is good for them, it would not be the best credit card for you.  Be sure to read the fine print about interest rates and finance charges before you apply for a credit card.

Getting back to the annual percentage rate, there are a number of credit cards that offer low interest rates.  When looking for a low interest credit card, there are a number of points to consider.  First, if you find a credit card that is offering a really low interest rate, you want to know what the trade off is going to be.  Most times when a credit card offers a good deal in one area they compensate for it in some other way.  For example, a low interest rate credit card could have a higher annual fee or not offer rewards and incentives.  Be sure that a few extra interest points are worth the trade off.  You may not mind paying an extra percentage point of interest if you get really good travel rewards and you are a frequent traveler. 

Also, most credit card companies will offer a really low or even zero percentage interest rate in their advertising.  This is another situation where you need to really read the small print.  That zero percent interest rate is usually an enticer to get you to sign up for the credit card and in the small print it has an expiration date.  What you really need to know is how long the how rate is valid for and what the APR will be after the honeymoon is over. 

If you already have a credit card with an APR that stings your wallet, there is still hope for you.  You know the phrase: "the squeaky wheel gets the oil."  Well, use it.  Try calling up your credit card company and asking for a lower interest rate. They just don't give it away to everyone, but those that ask often receive.  Just remember to be polite, explain that you like their credit card but need a reduction in the interest rate to continue using it, and be persistent.  If you don't get what you want the first time, then call another day.  A different representative may be more agreeable or ask to speak with a supervisor.  Many times they will give you a rate reduction as an incentive to keep your business.