In September 2018, I wrote about The Guaranteed Offer of Credit, which results from prescreening. That post can be viewed here. It is important to note that there is a substantial difference between prescreening and prequalification, and that difference may offer lenders and credit sellers some options to consider.
Prescreening is the process that credit reporting agencies (CRAs) go through to offer a list of consumers to a creditor to whom to make guaranteed offers of credit. The process begins with the creditor supplying to the CRA the criteria that it wants in the CRA’s development of a list of potential customers for the creditor. The catch is that, with limited exceptions, the creditor must extend a guaranteed offer of credit to all prescreened consumers on the list. The limited exception is that a consumer must continue to meet the creditworthiness standards included in the original criteria. Determining this continuing compliance is known as post-screening.
Not to be confused with prescreening and post-screening, there is yet another type of “screening” known as prequalification.
Unlike prescreening, prequalification still requires a consumer’s assent to access the consumer’s credit history. The process often starts from a fairly bland solicitation wherein the marketing asks a consumer if he or she would like to see information on certain credit finance options—for example, qualifying for a home loan, auto, or RV finance opportunities. Often, consumers do not even realize that by answering “yes,” they have authorized a “soft pull.”
Once the creditor obtains this assent, it then directs the CRA to make a soft inquiry into the consumer’s credit history. This is known as a soft pull. If the creditor is responding to an affirmative direction from the consumer, even though not an actual credit application, then the creditor does not have to make a firm offer of credit. Since such solicitations may even be made to consumers who have otherwise opted-out of receiving firm offers of credit, this prequalification tool can be very useful in marketing. So, this is a good result for the creditor.
It is also a good result for consumers because creditors may only use a soft pull for pre-qualifications, rather than a “hard pull.” A soft pull does not adversely affect a consumer’s credit score, but a hard pull does. That is, hard inquires affect a consumer’s credit score. A hard inquiry occurs when a consumer applies for a specific financial product. When there are a number of hard inquiries, CRAs consider that a negative factor and a consumer’s credit score is adversely impacted. So, prequalification enables consumers to benefit by receiving the sought-after credit information without actually applying for credit and without impacting the credit score.
Practice Pointer: The rules surrounding prescreening and prequalification can get technical, so be prepared to talk to your compliance expert when putting together a prequalification marketing initiative.
Please note: This is the seventy-fifth blog in a series of Back to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking here.