What is subprime lending? | credit cards

Subprime loans are typically a FICO score that falls below 670, and nearly a third of US consumers have it, according to them Data from the Experian credit agency. A subprime credit score can make credit more expensive and more difficult to access than if your score were good. With subprime loans, you may have fewer credit card, mortgage, and auto loan options.

Learn more about subprime loans, including how subprime borrowers can access them and how to improve a subprime loan score.

What is a Subprime Credit Score?

A subprime credit score is a score that represents greater credit risk than a prime or superprime credit score. Subprime scores are classified as poor or fair, both of which are at the lower end of the credit score ranges. Typically, subprime is a FICO credit score less than 670 or a VantageScore less than 600.

A subprime credit score could be due to less concerted factors, such as: For example, lots of credit card debt and new accounts, says credit expert John Ulzheimer, formerly of FICO and Equifax. But even a major factor, such as filing for bankruptcy or closing an account, can lead to subprime lending.

“If you reset something tomorrow, your score will be at or below 680,” says Ulzheimer.

Who is a Subprime Borrower?

A subprime borrower is someone whose credit does not qualify for prime interest rates and terms. The prime rate is the best rate that lenders offer their most creditworthy customers and is a starting point for setting interest rates on loans and credit cards.

Subprime borrowers can have:

  • Recently missed payments on credit accounts.
  • You have recently experienced a direct debit, garnishment or foreclosure.
  • Filed for bankruptcy in recent years.
  • Accumulated debt and ended up with a high debt-to-income ratio.
  • Faced with limitations due to limited credit history.

Subprime borrowers should expect to pay more for a loan, generally in the form of higher interest rates, compared to borrowers with good credit ratings. Lenders charge subprime borrowers more to compensate for taking on more risk. If you’re a subprime borrower, you haven’t proven your creditworthiness, and lenders know you have a greater chance of missing payments or defaulting.

What are subprime credit cards?

Subprime credit cards are cards designed for people with poor or limited credit history and are issued by major banks and subprime credit card companies. These cards tend to charge higher interest rates than traditional credit cards, often APRs that can exceed 30% to reflect the high risk of default. You could also have a low credit limit or prepayment.

However, a subprime credit card could help you rebuild your balance 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 helpful features, such as: B. Free access to the credit score.

Here are a few examples that US News rated highly among credit-damage cards:

The Capital One QuicksilverOne Cash Rewards Credit Card requires fair to good credit and charges an annual fee of $39. Cardholders receive unlimited 5% cashback on hotels and car rentals booked through Capital One Travel, the publisher’s booking portal, and unlimited 1.5% cashback on all other purchases. Free unlimited access to your credit score can help you monitor your credit score and you will be automatically considered for a credit limit increase after six months.

The Citi Secured Mastercard is designed for those 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 must make a deposit equal to your credit limit. The minimum deposit is $200. This card offers autopay and account notifications to help you keep track of payments, and reports to all three credit bureaus to help you build 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 interest rates. As with subprime credit cards, subprime loans tend to be expensive due to the consumer’s high credit risk.

Subprime mortgages can have higher interest rates, higher upfront costs, and higher short- and long-term costs. Interest rates alone are 8 to 10 percentage points higher than prime mortgages, according to Experian.

That’s tough when mortgage rates have risen above 6% for well-qualified borrowers. You could end up paying double-digit interest on a subprime mortgage.

“There are ways to get mortgages if your score is relatively low,” says Jeff Richardson, senior vice president of marketing and communications at VantageScore Solutions.

Whether you’re looking for a mortgage or auto loan, you can find lenders willing to work with subprime borrowers. Just know that you can pay high interest rates for the privilege of borrowing.

“For a 60-month new car loan, once you start falling below 700, interest rates become criminal,” Ulzheimer says.

You can choose to pay the higher interest rate or lower your borrowing costs by limiting your budget. If you can improve your credit rating, you may be able to refinance at a better interest rate.

How to Improve a Subprime Loan Score

Even small improvements in your subprime credit score could get you better deals on credit cards, loans, and other forms of financing. Here are some ways you can move your credit score out of subprime territory:

Improving a subprime credit rating takes patience and time. Late payments, collections, and bankruptcies can linger on your credit report for years, although their impact diminishes over time.
Fortunately, negative information counts less over time, Richardson says. “Credit improvement is often a marathon, not a sprint,” he says.

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