It’s a very simple question with a very complicated answer. Exactly how does a credit card solicitation find its way into your mailbox? I don’t think most people understand just how many moving parts there are “behind the scenes”, all with the goal of getting a card into your back pocket or purse. The chronology of events that occur prior to an offer being made is long and fairly misunderstood.
Step 1 – The Decision
Credit card issuers don’t do anything arbitrarily, especially when deciding whether or not to market a credit card to an individual or a group of individuals. The decision is generally one that’s based on a variety of metrics including, but not limited to, take rate (the percentage of consumers who will actually bite on a credit card offer, aka “response rate”), activation rate (the percentage of approved applicants who will activate the card when received), usage rate (the percentage of approved and activated card holders who will actually use it), and profit and loss (the amount of revenue generated by the cardholders minus write offs and overhead).
If a card issuer determines that marketing a specific type of card to a specific consumer or geography will yield a large number of users who will generate enough revenue…then we’re on to step 2.
Step 2 – The Prospecting
Walk to your mailbox almost any day and it’ll be filled with credit card offers. Why your mailbox? Again, it’s not arbitrary but based on hundreds of decision variables, which is often called the “selection criteria.” In order for you to get one of those offers the credit card issuer has to believe that you meet their criteria for credit risk. That’s usually one of the most important traits in the issuer’s mind. How in the world do they know what kind of risk you pose if you haven’t applied for credit? Here’s where it gets fun…
The credit reporting agencies all have massive databases and you’re in all of them. And unless you’ve “opted out” of receiving pre-approved credit card offers, they’re selling your information to credit card issuers for their prospecting purposes. Don’t get me wrong, they’re not actually selling your credit reports, yet. They’re just selling the issuers a list of consumers and addresses that meet their criteria for credit risk. Follow me…
John’s Bank wants to test market a new credit card in the Atlanta market. Let’s say hypothetically my bank wants to acquire 5,000 new test customers in that area. But I don’t want just any 5,000 customers. I want 5,000 customers with FICO scores greater than 720.
So, my next step is to tell the credit bureau that I want to buy a list of consumers who all live in Atlanta (I’ll give them a zip code list to go from) and all have FICO scores greater than 720. The credit bureaus then take that criteria and provide me with “counts” or the volume of consumers who meet my relatively simple requirements. Let’s say 2,500,000 people meet the “Atlanta plus FICO 720” criteria.
I can buy the entire list of 2,500,000 prospects if I want. But, remember, I only want to take on 5,000 new customers for my small test. A typical response rate for a credit card solicitation mail campaign is about half of 1%, which means if I mail my offer to all 2.5 million people I will likely end up with 12,500 new customers. That’s too many for my test. What does the bank do?
The next step in the process is for the list to get cut down to a size that will likely yield a number of new customers with which I’m more comfortable. And, since the response rate will likely be about ½ a percent I tell the credit bureau that I just want 1,000,000 prospects.
Step 3 – The Deployment
Now that we’ve determined 1,000,000 prospects will leave me with 5,000 new customers it’s time for me to send them the offer. The credit card issuers don’t do this in house. They’ll outsource the process to a professional mail house that will take delivery of the entire list of 1,000,000 prospects and merge their names and addresses on the credit card offer and drop them in the mail.
At this point the mail house sends the credit bureau a list of everyone who was sent an offer. It won’t be exactly 1,000,000 because some will be dropped because of address issues and other issues. The credit bureau takes that list of posts promotional inquiries on their credit reports.
Step 4 – The Delivery
A few days later you get home from work, check your mail, and find a new credit card offer from John’s Bank. 99.5% of you will trash it straight away. But, 0.5% of you will open it and find the offer appealing enough to fill out the accompanying application and send it back to me for processing. What have you just done? You’ve technically applied for credit with John’s Bank.
When I get the application back from you I’ll pull your full credit report and score. I do this to set the final terms of the card including the rate and the credit limit. Technically since I used credit report screening I have to offer you something. That’s the law. It’s called a “firm offer of credit or insurance.”
There are ways around that requirement though, like if you just filed bankruptcy the day before. But most of you will get a new card with a super cool John’s Bank logo on it. Within 30 days an innocuous envelope shows up in your mail with a Delaware return address. You open it and see your new card. And after you call to activate the card I’m happy to call you a new customer of John’s Bank. Welcome!
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. The opinions expressed in his articles are his and not of Mint.com or Intuit.