What is considered a subprime credit score?

If you have less than stellar credit, you may be classified as someone who is “subprime,” meaning that your credit score is lower than what is required to get the best interest rates, or “prime.”

More than a third (34.8%) of Americans fall into the subprime credit category, according to a 2019 Experian study.

Lenders consider that high-risk borrowers present some level of risk compared to the main borrowers, including a greater probability of having high balances and missing payments. As a result, high-risk borrowers often receive unfavorable terms on credit cards, loans, and other financial products that can add up to high costs over time. These costs make it more difficult to get out of debt and improve credit scores.

In fact, high-risk borrowers have an average of 7.5 delinquent accounts (more than double the national average of 3.6), and many high-risk accounts have past-due balances.

Below, CNBC Select reviews what it means to be subprime, how subprime credit cards work, and tips for improving your credit score.

What is a subprime credit score?

There is no single answer for all the credit scores that lenders consider subprime, but Experian offers a ranking: FICO scores that fall within the average and fair range of credit, between 580 and 669, are classified as subprime. However, each lender can use a different range.

You can have subprime credit for various reasons, including:

  • Late or late payments
  • High credit card balances
  • Past due (past due) accounts
  • Numerous credit inquiries
  • Brief credit history

If you have high-risk credit, you may have a harder time qualifying for the credit, and the credit products you receive will often have higher interest rates and fees.

What are subprime credit cards?

Subprime credit cards often have higher interest rates and numerous fees, as lenders see it as a higher risk. This can add up to high costs compared to traditional cards that have minimal fees, or if they charge fees, the card comes with luxury benefits. In addition to more fees, you will generally receive a smaller line of credit compared to someone with a primary credit score, and the card probably does not come with a rewards program.

The Total Visa® card is an example of a subprime credit card that comes with high fees. These are the main fees that will be charged:

  1. Single program / account opening fee: $ 89
  2. Annual quota: $ 75 the first year, then $ 48
  3. Monthly service fee: $ 0 the first year, then $ 6.25 per month

The first year you have the Total Visa Card, you will end up paying $ 164 in fees. That drops to $ 123 in subsequent years, which is still a sizable amount to pay for a card with no rewards and an extremely high APR of 34.99%.

However, there are select subprime cards that do not have an annual fee and can help you build credit through timely payments. Common types of high-risk cards include secured cards, such as the Capital One® Secured Mastercard®. This card can be used to make purchases like a regular credit card, but you must make a minimum security deposit of $ 49, $ 99 or $ 200, depending on your creditworthiness, to receive a credit limit of $ 200.

If you don’t want, or can’t afford, to reserve money for a security deposit, you can consider alternative traditional credit cards, such as the Capital One® Platinum credit card. This card also has no annual fee and does not require a security deposit.

Both Capital One cards have a high variable APR of 26.99%, which is in line with other subprime cards listed on our best credit cards for fair and average credit. There are high-risk cards with even higher interest rates, such as the Total Visa® Card, which has a variable annual percentage rate of 34.99%. According to the latest Federal Reserve data from February 2020, that rate is almost double the national average credit card APR of 16.6%.

For example, suppose you have a balance of $ 500 and only make the minimum payment of $ 25 per month. This is the interest you will incur with a high risk card with an APR of 34.99% compared to a main card with an average APR of 16.61%.

  • High-risk interest charges: $ 261
  • Preferential interest charges: $ 89

Over the course of the repayment, you will pay almost double the interest charges with a subprime credit card compared to a prime credit card. And this number will increase if you have a higher balance on your card for a longer period of time

There are some high-risk cards that offer rewards programs and a reasonable annual fee. The Credit One Bank American Express® card, for example, offers a 1% cash back on all purchases and a $ 39 annual fee for the card. To offset the fee, you will need to spend $ 3,900 a year. This card does not have an account opening or monthly service fees, but it has a relatively high variable APR of 23.99%.

If you want to take advantage of the many advantages that the best credit cards offer, you need to improve your credit score in order to advance to a good credit score and preferential credit products, which we explain below.

How to improve a subprime credit score

If you have a subprime credit score, take time to identify the reason, which may include late payments or high balances. You can search for this information in your credit report, which you can check for free every week with each credit agency (Experian, Equifax and TransUnion) until April 2021. To improve your credit score and achieve a good or excellent credit score Follow the credit repair tips below.

  • Make payments on time: Payment history is the most important factor in your credit score, so it is essential to always make at least your minimum payment on time. This keeps your account updated and up to date. Consider setting up automatic payment to guarantee timely payments.
  • Pay in full: Minimum payments will help you keep your account current, but you must pay your bill in full every month to reduce interest charges and the amount you owe on your credit cards, also known as your credit utilization rate.
  • Don’t request too many accounts at once: Every time you submit a credit application, and regardless of whether it is approved or denied, a query appears on your credit report. This can reduce your credit score by approximately five points, although it will recover in a few months. As a result, try to limit applications as necessary and consider using prequalification tools that do not harm your credit score.
  • Get credit for paying monthly cell phone and utility bills on time: Experian Boost is a free service that allows you to add payment history for your utilities and cell phone payments to your Experian credit report. Simply connect your bank account (s) to Experian Boost so that it can identify your cell phone and utility payment history and help you improve your credit score.

Information on the Total Visa®, Capital One® Secured Mastercard® and Capital One® Platinum Credit Card has been independently collected by CNBC and has not been reviewed or provided by the card issuers prior to publication.

Editorial note: The opinions, analyzes, reviews or recommendations expressed in this article belong exclusively to the editorial staff of CNBC Select and have not been reviewed, approved or endorsed by any third party.