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.

Doing Your Taxes? Review Your Finances!

Every year about this time, lots and lots of people start on their taxes.  Gathering the proper forms, W-2’s, 1099’s, etc., going through the appropriate receipts, and then actually starting to prepare their annual income tax returns (or taking them to a tax professional to prepare for them.  It’s a lot of work for some people and not so much for others.  But, you know what truly makes sense to do when you do your taxes?

Review your overall financial picture, too!  That’s right, you’ve already dug up your earnings, you’ve already reviewed your expenses, and you’re getting closer to knowing exactly how much you will have to pay or be refunded on your 2020 tax return.  So, why not go one small step further?

  • Take a look at your credit report!
  • Review your credit card balances!
  • Review your interest rates!

Where can you improve your credit score?  How can you improve it?  Are your credit card balances too high?  Are you paying too much interest?  Perhaps your overall credit situation has changed and you now qualify for better credit cards with better interest rates?  Maybe a personal loan makes sense?  And maybe, just maybe, you’re doing pretty well this year!

The simple fact of the matter is, you will never know unless you take the time to go over your finances.  And there is no better time than right now, when you already have the information in front of you.  So, what are you waiting for?  Get to work on your finances, too.

What is a Bad Credit Score?

What’s your credit score?  Is it Excellent, Good, Fair, or Bad?   Is your credit score holding you back from home ownership, buying that new car, or even getting your dream job?

Although you wouldn’t think that it should, the definition of bad credit has actually changed over the course of the past decade or so.  What was once considered a good credit score is possibly now only fair and those with fair credit scores might even have fallen into the bad credit range.

Here are a few things to know about your credit score:

Bad credit varies from lender to lender.  For example, mortgage companies have very strict credit requirements while catalog cards have fairly lax requirements.  Mortgage lenders may consider anything under 640 as a bad credit score, but credit card companies may offer credit cards to people with credit scores lower than 600.  The interest rates may be substantially higher and there may be additional fees, but you can usually still get a credit card.

Generally a credit score below 500 is considered very bad credit and you may struggle to get any kind of credit if your score dips that low.  The sad part is, it could only take one late payment, one medical bill sent to collection, or at the worst, bankruptcy, to knock your score down considerably.  And it can take months and years to repair your credit after such an event.

During that time, you’ll likely pay nearly double the interest rate as compared to those with scores above 640. And this isn’t just your credit cards, it will also affect the interest rate on a new (or used) car, and potentially even your insurance rates.

Understanding how your credit score impacts your interest rates for loans and credit cards is an important step to rebuilding your credit.

Credit: Use It or Lose It

If you listen to certain famous financial advisers, some of them will tell you that you should never use credit, that you should pay for everything in cash, and that you should strive to have no credit score at all.  While it’s great if you can buy everything outright and never use credit for anything, it’s also not very practical in today’s world.  How many of us have an extra $25,000 around to pay cash for a car?  Or an extra $150,000 around to pay cash for a house?  Not very many people can do that, can they?

The truth is, almost no one can pay cash for everything.  And there are very few individuals in this world who have no credit score – to have no credit score, you would have to have been out of debt for at least ten years, and even then, I would almost bet you are listed somewhere on the credit scale… you just might not like where you’d be listed.

Is there an alternative to never using credit?

Actually, there is a smarter alternative to the no credit, no credit score myth, and that’s pretty simple.  You just have to use credit wisely!  Instead of having no credit cards, no car loan, and no home loan, you should strive to have a good balance of credit, which would also ensure that you have a good credit score!

You should have at least one or two good credit cards and your debt to credit ratio should always be below 33%. And no, contrary to popular belief, you don’t have to carry a balance.  Use your credit cards once or twice a year and pay them off monthly!  That way, you pay no interest and your debt to credit ratio stays around 0%.  And, make sure that the cards you carry are appropriate for your credit rating – in other words, don’t even try for a credit card that requires excellent credit if your credit score is Fair or even Poor.

When you’re shopping for credit cards, know your credit score and keep the inquiries at a minimum!  Hard inquiries to your credit report can cost you up to five points on your score and if you’re bordering between good and fair, or fair and poor, that five points can mean the difference between getting approved for that new car loan (or new home loan) and not getting approved.

(If you don’t know your credit score, check out our credit monitoring page from some great options!)

What if you don’t have any credit to start with?

If you’re just starting out and don’t have any real credit, consider getting a secured credit card, or even better, look at an online store card like Fingerhut – most people get accepted for a Fingerhut Credit Account issued by WebBank , and they have some pretty sweet merchandise at decent prices, so you won’t be disappointed with your purchases.

So, let’s dispel the No Credit Myth once and for all – remember, when it comes to your credit, Use it or Lose it!