Subprime Credit?

What is a “Subprime” credit level?  Subprime credit means that lenders might consider you a credit risk.  Not only will they be more likely to reject your credit application, but if and when they do issue you credit, you’ll pay a much higher rate to offset the “risk.”  But did you know that not all subprime credit is treated exactly the same way?

Here’s a little more information on the various credit levels and how each one can affect your interest rates on any type of credit card or loan that you take out.

Basically, there are five credit score levels, as outlined by the Consumer Financial Protection Bureau:

  • Super-prime (720 and above)
  • Prime (660 – 720)
  • Near-prime (580 – 619)
  • Subprime (580 – 619)
  • Deep subprime (580 and below)

These credit ratings comprise an important part of each borrower’s risk profile, which is what lenders use when they’re deciding whether to approve your application, and if so, where to set your interest rates.

It’s worth noting lenders may use slightly different scales whether they work off the FICO scoring system, the VantageScore model, or a proprietary set of ranges. The VantageScore typically classifies borrowers in these ranges:

  • Super-prime (781 – 850)
  • Prime (661 – 780)
  • Near prime (601 – 660)
  • Subprime (300 – 600)

How common is it for a borrower to have a risky profile based on their credit standing?  About one in five Americans has a subprime rating to some degree, with six percent of U.S. adults falling within the “subprime” category and 13 percent of American adults having “deep subprime” credit.

What are the consequences of having Subprime credit?  Your credit standing is one major factor lenders consider when evaluating your application, whether you’re trying to get a credit card, finance a car, take out a personal loan or finance a home.

Here’s a sample break down of auto loan interest rates per category based on Experian data for early 2020 and the VantageScore scale:

  • Super-prime (781 – 850): 3.65 percent
  • Prime (661 – 780): 4.68 percent
  • Non-prime (601 – 660): 7.65 percent
  • Subprime (501 – 600): 11.92 percent
  • Deep subprime (501 – 600): 14.39 percent

As you can see, borrowers with deep subprime credit can expect to pay an interest rate nearly three times higher than those considered prime. Even a few percentage points of difference can add up to hundreds or thousands of extra dollars over the lifetime of a loan or credit card.

Finally, subprime mortgages can carry interest rates as high as eight to 10 percent, and furthermore may require the borrower to put down a higher down payment between 25 and 35 percent to secure funding. Over the course of a 15- or 30-year housing loan, owning a home can become significantly more expensive for borrowers with poor credit.

As you can see, deep subprime and subprime credit makes it harder to get credit and much more costly when you do get credit.  So, do anything you can do to strengthen your credit history before applying.  This can help to smooth out the process and keep a little more money in your pocket.