Until the beginning of 2011 very few people had ever heard or used the phrase “adverse
approval.” The words just don’t seem to pair well. How can an approval be adverse?
The new risk based pricing rules changed all of that and now the two words go together
as well as “credit” and “card.”
An adverse approval occurs when you apply for a loan, credit card or any other credit or
insurance benefit with the expectation that an approval would yield favorable terms. So,
for example, if you see an advertisement for a 0% balance transfer offer and you apply
for it but get approved for a 7.9% offer instead…you’ve been adversely approved.
This is most common in the credit card, mortgage lending and auto lending
environments. Those loans types almost always have a variety of “offers” which depend
on your credit risk. The better your risk, the better the offer. It cuts both ways though. If
your credit is poor, then so is the offer.
Underwriting loans and insurance this way is actually beneficial to consumers. It allows
banks and insurance companies to do business that they may not have done business
with if they couldn’t have flexibility in their pricing. Think of it this way, if a bank could
only charge you 7.9% interest on a credit card then would anyone with poor credit be
using plastic? No way.
But the bank’s ability to levy, for example, a 24.9% interest rate allows them to feel more
comfortable and confident that they’ve just done a good deal. It’s more expensive for
the consumer but, frankly, their options are limited by their poor credit. And if we’ve
learned anything in the past 3 years it’s that consumers have a voracious appetite for
credit and are willing to get into debt under almost any terms, adverse or not.
Michael B. Citron is an internationally known public speaker and author. He lectures for professional associations worldwide. Michael is a serial entrepreneur who is dedicated to living the American dream, and helping others to do the same. His role at DisputeSuite.com has placed him in the spotlight of the credit repair industry. DisputeSuite is the largest provider of technology and education services to the industry, and has been a catalyst in the forward movement to standardize the credit repair industry.