How Credit Scores Are Calculated
Your credit score is a number ranging between 300 and 850. It is calculated by the major credit bureaus.
- Higher scores are associated with reliable borrowers who often receive favorable terms and low APRs
- Lower scores can make it expensive to borrow money or prevent you from being approved in the first place.
Credit scores are calculated using the following factors - with some being more heavily weighted than others.
- Payment History (35%) - Measures how reliably you pay your installments each month .
- Credit Utilization (30%) - This is the percentage of your total available credit that you’re currently using. Ideally it should be under 30%, equal to $300 on a $1000 credit limit.
- Age Of Credit Accounts (15%) - The longer your account has been open, the better your credit score will be.
- Credit Mix (10%) - You get extra points for using a variety of credit products.
- New Credit Applications (10%) - Applying for a lot of new credit at once can cause your score to drop.
There are several credit score tiers - ranging from the top superprime tier to the subprime tiers at the bottom of the ranking.
If your score falls into the “Fair” or “Very Poor” tiers you are probably considered a subprime borrower.
|FICO Score Range ||Tier|
How Do Subprime Lenders Work?
Subprime loan providers focus on lenders with credit scores lower than 600.
- Traditional lenders may be reluctant to approve your credit application if you fall into the lower two tiers on the FICO scale.
- Subprime lenders are usually willing to extend credit to less creditworthy customers - but they tend to charge higher interest rates.
- The cost of borrowing from a subprime lender may be higher but it’s also a good way to secure a loan, repay it diligently and rebuild your credit.
What Does This All Mean?
Subprime loans generally come with higher APRs - and that means you’ll be paying more interest than you would on a bank loan.
- The higher costs associated with this type of loan can make it difficult to borrow large amounts of money - but it may be a good solution for amounts under $20,000.
- Your credit score may not play a big part in the loan application process but you should still expect a credit check to be done.
- Some lenders pay attention to negative items like defaults and liens when deciding whether you’ll be a reliable borrower or not.
There several financial products aimed at subprime borrowers.
Some of them are unsecured while others require collateral (either a cash deposit or an asset like a car or home).
Here are some of the most popular products that you may come across.
- Secured Credit Cards - You’ll need to pay a cash deposit before the card is activated - and your monthly limit will be a certain percentage of the deposit. You’ll still need to pay your monthly installments and keep your card in good standing in order for your credit to improve.
- Personal Loans - These may be secured or unsecured - and the secured type may offer better APRs and higher loan amounts. Approval will depend on your monthly income and expenses.
- Payday Loans - These high APR lending products are designed for short term borrowing - you’ll want to repay them in full when you get your next salary. Allowing a payday loan to roll over means paying high interest - up to 400% per year.
While these credit products may have high interest rates, they also give you access to cash and offer you a second chance to rebuild your credit.
If your credit score rises you can apply for lower-APR loans in the future.
Subprime borrowers are those who have credit scores between 300 and 580 on the FICO scale.
If you fall in this category you may need to apply for a loan with a subprime lender.
The subprime credit products available include secured credit cards, personal loans and payday loans.
Borrowing money with bad credit often means that you’ll pay higher interest charges on your loan amount - but you’ll also have the chance to repay your loan and improve your credit score.