A subprime credit score can affect your ability to get financing for student loans, personal loans, or a new credit card. (iStock)
If your goal is to be approved for a new loan or life of credit, your credit score is one of the most powerful tools you have. Finally, the score you have given can determine the types of loans you are eligible for and the corresponding interest rates you will be given when you are finally approved.
Most people are aware that their score is rated on a scale of poor to excellent by the credit bureaus. However, they may not be aware that another designation also exists: prime credit score and subprime credit score.
Below is a closer look at scores for subprime credit. It will cover what this designation means, how having a subprime credit score will affect you, and how you can improve your credit score to give better rates. Keep reading to learn more.
What is a subprime and prime credit score?
In truth, each lender uses a somewhat different scoring model, so it can be difficult to give specifications on exactly what will count as a subprime score. However, as a rule of thumb, any FICO score below the ‘Good’, ” Very Good ‘or’ Excellent ‘score is likely to be considered a subprime score.
As a refresher, here’s how FICO defines its scoring model:
- 800 – 850: excellent
- 740 – 799: Very good
- 670 -739: Good
- 580 – 699: Fair
- Under 580: min (my credit)
Apart from that, those in the market for a home loan can get personalized rates with a mortgage broker like Credible without affecting their credit score.
FICO SCORE VS. CREDIT SCORE: WHAT IS THE DIFFERENCE?
How does a subprime credit score affect me?
Simply put, having a subprime credit score can affect your ability to get financing for student loans, personal loans or a new credit card. Since lenders see your credit score as an assessment of the level of risk associated with lending to you, they may want extra confidence that they will get paid.
If you have a subprime score, you may need to take certain additional steps to be approved for a loan, such as applying to a co-signer. It is also unlikely that you will have access to the same rewards and benefit options as someone with a prime credit score. Subprime lenders are rarely eligible for 0% APR credit cards, for example.
If you are in the market for a new card, you can use Credible to see what amounts for lenders are available with your score.
HOW TO FIND THE BEST CREDIT CARD CARDS
That said, even if you are approved for the new loan or credit card, a subprime score will almost guarantee that you will pay higher interest rates than someone who has a better score. In addition, some financing products targeted at subprime lenders also come with additional fees such as monthly service charges as well as a higher annual fee.
How do I improve my subprime credit?
If you find that you have difficulty getting approved for financing or that you are charged high interest rates, the best thing you can do is take steps to increase your credit score. Below are a few tips you can use to launch your credit score in the prime range.
Make your payments on time
Remembering your credit card or loan repayment on time is one of the best things you can do to improve your credit history. In total, history of loan payment accounts for 30% of your total score – so, it is important to avoid late payment of any kind. If you have trouble remembering to make your payments every month, you can set up automatic payments with your lenders. Alternatively, most credit card issuers offer the option to send payment reminder via email.
FIXED CREDIT CARDS CAN HELP BUILD CREDIT – HERE
Keep your credit levels low
Your credit usage rate is another important factor in determining your credit score. This ratio earns an additional 30% of your score and it measures your current balances against your total amount of available credit. In general, you should strive to keep this ratio as low as possible by paying off all existing debts and being careful about new costs. Ideally, this ratio should be below 30%.
Remember to fill in too many applications at once
Finally, 10% of your credit score is determined by the number of recent questions you have about your credit reports. Each time you apply for a new type of financing, the creditor will generally do what is known as a ‘hard draw’ on your credit, which will mark a hard survey on your credit reports. If you have too many questions at once, it can hurt your score, and that’s why it’s filling too many applications at once.
HOW TO REFER YOUR CREDIT LIMIT WITHOUT YOUR SCORE
The end line
If you have a subprime score and need your financing, your best bet is to shop for a loan. Since each lender uses a slightly different scoring model, you may find that you offer a better rate with one creditor as opposed to another.
Those who shop around rates can benefit from a visit to an online marketplace like Credible, where they can research personal lending rates and lenders from the comfort of home.
