What is subprime credit? | Credit card
Subprime credit is typically a FICO score below 670, and nearly a third of U.S. consumers have it, according to Experian credit bureau data. A subprime credit score can make credit more expensive and harder to access than if your score was good. With subprime credit, you may have fewer options for credit cards, mortgages, and car loans.
Learn more about subprime credit, including how subprime borrowers can access it and how to improve a subprime credit score.
What is a subprime credit score?
A subprime credit rating is a rating that presents a higher lending risk than a prime or superprime credit rating. Subprime mortgage scores are categorized as poor or fair, with both at the low end of the credit score range. Typically, subprime is a FICO credit score below 670 or a VantageScore below 600.
According to credit expert John Ulzheimer, alumnus of FICO and Equifax, a subprime credit score could be due to lesser factors, such as a lot of credit card debt and new accounts. But a major factor, like filing for bankruptcy or letting an account go bad, could also lead to subprime credit.
“Fault on something tomorrow, and your score will be 680 or less,” Ulzheimer said.
What is a subprime borrower?
A subprime borrower is someone whose credit does not qualify for preferential rates and terms. The prime rate is the best rate lenders will offer their most creditworthy customers and a starting point for setting loan and credit card rates.
Subprime borrowers may have:
- Recently missed payments on credit accounts.
- Recently experienced a charge-off, repossession or foreclosure.
- Filing for bankruptcy in recent years.
- He accumulated debt and ended up with a high debt-to-income ratio.
- Faced constraints due to limited credit history.
Subprime borrowers should expect to pay more for credit, usually in the form of higher interest rates compared to borrowers with good credit. Lenders charge subprime borrowers more to compensate for taking more risk. If you’re a subprime borrower, you haven’t proven your creditworthiness and lenders know you’re more likely to miss payments or default.
What are subprime credit cards?
Subprime credit cards are cards designed for people with poor or limited credit and issued by major banks and subprime credit card companies. These cards tend to charge higher interest rates than traditional credit cards, often annual percentage rates that can exceed 30%, to reflect the high risk of default. You may also have a low credit limit or an initial deposit.
However, a subprime credit card could help you rebuild your credit if you pay your bills on time and keep a low balance or pay it off in full. Your card may also have a rewards program and other useful features, such as free credit score access.
Here are some examples that have been rated highly by US News among cards for people with credit difficulties:
The Capital One QuicksilverOne Cash Rewards credit card requires fair to good credit and charges an annual fee of $39. Cardholders receive unlimited 5% cash back on hotels and rental cars booked through Capital One Travel, the issuer’s booking portal, and unlimited 1.5% cash back on all other purchases. Free, unlimited access to your credit score can help you monitor your credit health, and you’ll automatically be considered for a credit limit increase after six months.
The Citi Secured Mastercard is designed for people with no credit history and has no annual fee. If you meet the income and debt criteria, you will be approved for a card, but you will need to provide a deposit equal to your credit limit. The minimum deposit is $200. This card offers automatic payment and account alerts, which can keep you up to date on payments, and it reports to all three credit bureaus to help you build a credit history. Citi will review your account within 18 months to determine if you are eligible for a refund of your deposit.
What are subprime loans?
Subprime loans, including mortgages, personal loans, and auto loans, are available to borrowers who cannot qualify for loans at the best rates. As with subprime credit cards, subprime loans tend to be expensive due to high consumer credit risk.
Subprime mortgages can have higher interest rates, higher upfront expenses, and higher short-term and long-term costs. Rates alone are 8 to 10 percentage points higher than for prime mortgages, according to data from Experian.
This is difficult when mortgage rates for qualified borrowers have exceeded 6%. You could end up paying double digit rates for a subprime mortgage.
“There are ways to get mortgages when your score is relatively low,” says Jeff Richardson, senior vice president of marketing and communications at VantageScore Solutions.
Federal Housing Administration loans, for example, are available to borrowers with a FICO score of 500 and a 10% down payment. Many FHA lenders will require a higher, although still subprime, credit score for a loan. .
Whether you’re looking for a mortgage or a car loan, you can find lenders willing to work with subprime borrowers. Just be aware that you could be paying high rates for the privilege of borrowing.
“For a new 60-month auto loan, as soon as you start dropping below 700, the rates start to get punitive,” Ulzheimer says.
You can choose to pay the higher rate or lower your cost of borrowing by limiting your budget. If you can improve your credit, you may be able to refinance at a better rate.
How to Improve a Subprime Credit Score
Even small improvements to your subprime credit score could get you better deals on credit cards, loans, and other types of financing. Here are some ways to move your credit score out of subprime territory:
- Always pay your bills on time. Do your best to be on time, even if you can only make a minimum payment.
- Pay off credit card balances. The fastest way to see your score improve is to pay off your credit cards if you have the use of credit, says Richardson. Your score may improve in the next billing cycle if issuers report lower balances. Try not to use more than 30% of your total available credit or even less for a healthy credit score.
- Add positive information to your credit report. Try Experian Boost to add one-time utility, rental, and streaming payments to your Experian credit reports.
- Clean up your credit reports. Request and review your reports, and dispute credit errors. Delete incomplete or inaccurate information from each credit report.
- Consider debt consolidation. Could a debt consolidation loan give you a better rate than your credit cards on your debt and simplify your payments?
Improving a subprime credit score takes patience and time. Late payments, collections and bankruptcies can linger on your credit report for years, although their effects lessen over time.
Fortunately, negative information matters less over time, says Richardson. “Improving credit is often a marathon, not a sprint,” he says.