What is considered a risky credit score?
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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 needed to get the best interest rate or “principal.” .
More than a third (34.8%) of Americans fall into the subprime category, according to a Experian Study 2019.
Lenders consider risk borrowers present a certain level of risk compared to blue chip borrowers, including a higher likelihood of having high balances and missing payments. As a result, subprime borrowers often receive adverse terms on credit cards, loans, and other financial products which can add to high costs over time. These costs make deleveraging and improving credit scores more difficult.
In fact, subprime borrowers have on average 7.5 overdue accounts (more than double the national average of 3.6) and many risky accounts have overdue balances.
Below, CNBC Select examines what it means to be at risk, how risky credit cards work, and tips to improve your credit score.
There is no single answer to credit scores that lenders consider subprime, but Experiential provides a classification: the FICO scores that enter into the fair and average credit range – between 580 and 669 – are classified as subprime. However, each lender can use a different range.
You can have subprime credit for a number of reasons, including:
- Missed or late payments
- High credit card balances
- Overdue (overdue) accounts
- Many credit requests
- Short credit history
If you have subprime credit, you may have a harder time qualifying for credit, and the credit products you receive will often have higher interest rates and fees.
Subprime credit cards often have higher interest rates and many fees because lenders see you as a higher risk. This can be high costs compared to traditional cards which have minimal fees, or if they charge a fee, the card comes with luxury perks. In addition to additional fees, you will usually receive a smaller line of credit compared to someone with a prime credit rating and the card likely does not come with a rewards program.
The Total Visa® card is an example of a subprime credit card with high fees. Here are the main fees you will be charged:
- One-off program / account opening fees: $ 89
- Annual subscription : $ 75 the first year, then $ 48
- Monthly service charges: $ 0 for the first year, then $ 6.25 per month
The first year you have the Visa Total card, you will end up paying $ 164 in fees. That drops to $ 123 in subsequent years, which is still a large amount to pay for an unrewarded card and an extremely high APR of 34.99%.
However, there are some risky cards that don’t have an annual fee and can help you build credit with on-time payments. Common types of risk cards include secure cards, 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 put money aside for a security deposit, you can consider other traditional credit cards such as Capital One® Platinum Credit Card. This card also has no annual fee and does not require a security deposit.
Both Capital One cards have high variable APRs of 26.99%, which is in line with other subprime cards listed in our best credit cards for fair and average credit. There are subprime cards with even higher interest rates, like the Total Visa® card, which has a variable APR of 34.99%. This rate is almost double the national average credit card APR of 16.6% according to the The most recent data from the Fed from February 2020.
For example, let’s say you have a balance of $ 500 and only make the minimum payment $ 25 per month. Here is the interest you incur with a subprime card with an APR of 34.99% compared to a premium card with the Average APR of 16.61%.
- Subprime 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 rate credit card. And this number will increase if you have a larger balance on your card. for a longer period.
There are a few risk cards that offer rewards programs and reasonable annual fees. The One Bank American Express® Credit Card, for example, offers 1% cash back on all purchases and an annual fee of $ 39 for the card. In order to offset the costs, you will need to spend $ 3,900 per year. This card has no account opening fees or monthly service fees, but has a relatively high variable APR of 23.99%.
If you want to take advantage of the many benefits offered by the best credit cards, it is necessary to improve your credit score so that you can upgrade to a good credit rating and premium credit products, which we explain below.
If you have a risky credit score, take the time to identify the reason, which can include missed payments or high balances. You can look up this information on your credit report, which you can consult for free every week with each credit Company (Experiential, Equifax and TransUnion) until April 2021. In order to improve your credit score and obtain a voucher or excellent credit rating, follow the credit repair tips below.
- Make payments on time: Payment history is the most important factor in your credit score, which makes it essential to always make at least your minimum payment on time. This will keep your account up to date and in good standing. Consider setting up automatic payment to ensure payments on time.
- Pay in full: Minimum payments will help keep your account up to date, but you need to pay your bill in full each month to reduce interest charges and the amount you owe on your credit cards, also known as your credit utilization rate.
- Don’t ask for too many accounts at once: Every time you submit a credit application, and regardless of whether you are approved or denied, a request appears on your credit report. This can lower your credit score by approximately five points, although it will rebound in a few months. Therefore, try to limit apps as needed and consider using prequalification tools that don’t hurt your credit score.
- Get credit to pay your monthly utility and cell phone bills on time: Experience boost is a free feature that allows you to add the payment history of your utility and cell phone payments to your Experian credit report. Simply connect your bank account (s) to Experian Boost so it can identify your utility and cell phone payment history and help you improve your credit score.
Information about the Total Visa® Card, Capital One® Secured Mastercard®, and Capital One® Platinum Credit Card was independently collected by CNBC and was not reviewed or provided by card issuers prior to publication.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.