At a Glance
A person’s credit score and credit history have a major impact on their ability to borrow money, whether that be now or in the future. This raises the commonly asked question of what is subprime credit? A subprime credit score can drastically reduce the likelihood of receiving approval for a loan, rental application, and much more. Learn the ins and outs of subprime credit, as well as how to increase your credit score, to ensure you retain your ability to borrow money.
In this article, you’ll learn:
What is subprime credit?
Subprime credit is any credit score which is lower than what’s required to get the best, known as “prime”, interest rates. Over a third of Americans fall into the subprime category. Technically, a subprime credit score is any score below 669, but specific lenders may have different cutoffs for when a credit score becomes subprime.
Related: Credit Score Ranges
Products for subprime borrowers
As someone who qualifies as a subprime borrower, you may be wondering what products are available to you, if any. Even with a subprime credit score, the standard items you may apply for are still an option, but you will likely receive less favorable terms with those products. For example:
1. Subprime loans
Subprime loans, or loans for bad credit, are extremely common. Unlike a prime loan, subprime loans will typically offer a prospective borrower a smaller loan amount, higher interest rates, or certain fees that make the loan less appealing. Therefore, if you have subprime credit, a small personal loan is a better bet when borrowing as compared to a standard personal loan.
2. Subprime credit cards
Subprime credit cards usually come in two forms: secured and unsecured. For people with lower credit scores, secured credit cards typically require you to send a refundable security deposit to open your account. Unsecured subprime credit cards will typically have higher fees and slim-to-no benefits associated with the card.
3. Subprime mortgages
Shopping for a home is a major step in any person’s life. From a financial standpoint, it is one of the biggest decisions you may ever make. If you are looking to take on a home loan with subprime credit, however, the home loan you are offered may have a higher closing cost, higher down payment, higher interest rate, and much more.
4. Subprime auto loans
Like a subprime mortgage, a subprime auto loan will usually come with a higher down payment required for the vehicle and a higher interest rate. It’s also possible that a lender will give you a longer interest rate to reduce your monthly payments to ensure you can meet them, but the trade-off is that you will pay more in interest over time.
Who is considered a subprime borrower?
When looking at what subprime means, it’s essential to consider who is a subprime borrower. In short, anybody who does not qualify for prime interest rates is a subprime borrower. A person may fall into this category, ranging from poor credit history, filing for bankruptcy in the last few years, foreclosure, and much more.
Prime vs subprime credit score
The difference between prime and subprime credit has everything to do with your credit score. Typically, a score below 669 will qualify a potential borrower as subprime and anything above warrants a prime qualification. However, different lenders will set the cutoff point at different levels, meaning your qualification of prime vs. subprime is a lender-by-lender event.
How to improve subprime credit score?
Borrowing with a subprime credit score is more expensive, plain, and simple. Learning how to improve your credit score over time can help teach a person strong financial habits while saving money when borrowing.
1. Make timely bill payments
Start by ensuring each one of your bill payments is made on time and in full. Set a specific date to make each payment and create the habit of fulfilling that payment on that date weekly, monthly, or whenever applicable. Avoid missing a payment by more than 30 days, as this can add a late payment mark to your credit history.
2. Pay down credit card balances
When you carry a high balance on your credit card, you also carry a high credit utilization ratio. For example, if you can borrow a balance of $10,000 but carry $8,000 on average, you have an 80% credit utilization ratio. Aim to bring your credit utilization score down to below 30% by the time your statement hits.
3. Add positive information to your credit file
Your score and history will improve by simply making loan payments, credit card payments, or other debt payments that are reported to the credit bureaus. If you can, add phone bills, utilities, or other additional bills you always pay to help speed up the process.
4. Don’t apply for too many new accounts
When you apply for something that requires a credit check, a hard inquiry into your credit occurs. It’s normal for your credit score to drop slightly by a couple points when this check occurs. However, if you consistently try to open new accounts and have a history of hard inquiries, it can be a red flag to lenders, and it can also cause constant drops in your credit score.
The current subprime rate falls into two parts: deep subprime and subprime. The current deep subprime rate is 21.50% and the current subprime rate is 20.40%. For perspective, the current prime rate is 16.80%, which is a noticeable difference.
Around one-third of Americans have subprime credit scores, meaning they have a credit score that falls beneath 669.
Yes, subprime loans are almost always more expensive than a prime loan due to a higher interest rate, longer repayment times, and a few other factors. If you are a subprime borrower, improve your credit score before applying to borrow funds.