What is Subprime Credit? How Credit Card Issuers Evaluate Consumer Risk

Here’s a confession: I’ve never had subprime credit. Yet as a financial writer, I’m well familiar with credit issues and the difficulties poor credit can cause. With subprime credit, it may be difficult for you to be approved for a credit card, personal loan, or other financing. 

If you are approved, you’ll likely be offered higher rates and less favorable terms than someone with better credit — not a great situation to find yourself in.

Subprime credit is synonymous with bad credit. It refers to low credit scores and loans with high interest rates.

Having subprime credit may not be your fault. A financial hardship (e.g., divorce, job loss, the death of a family member), unexpected expenses (e.g., medical bills), or a poor financial education could push you — or anyone, really — into subprime credit status.

The silver lining is that subprime credit doesn’t necessarily mean you won’t be able to qualify for credit at all, though it may take more time and research to find the right credit products for your situation.

Subprime credit isn’t easy to define, even for me. 

That’s because the term is used differently in different situations. It might refer to subprime mortgages, subprime loans, subprime cards, or other types of debt in the subprime category. 

Though the specifics may vary, the general concept is fundamentally the same:

How Your Credit Score Factors In

Your credit score is a key factor in whether you have subprime credit. Your credit score is a three-digit number that financial companies use to try to predict whether you’ll make your payments for new credit on time — or at all.

These predictions determine whether lenders and card companies will offer you credit, and if so, with what rate and other terms, such as your maximum loan amount or credit limit.

Your credit score is based on information in your credit file, or credit history. Your history includes the number of loans or other credit accounts you currently have, the types of credit you’ve used, whether you made your payments on time, and if not, how late your payments were, among other details.

If you don’t know what’s in your credit history, you can request free copies of your credit reports from the three major credit bureaus, Experian, Equifax, and TransUnion, at AnnualCreditReport.com, a website authorized by federal law. 

I request copies of my reports every few years to make sure they’re error-free, even though I’m not planning to apply for new credit.

If you are planning to apply for credit, you might want to get your credit scores as well as your credit reports. The two most commonly used scores are the FICO Score and the VantageScore.

Here are their scoring ranges:

Within these scoring ranges are prime categories that can help credit card issuers sort borrowers in different terms.

Here are where FICO scores fall in the prime range:

• Superprime: 720 or higher
• Prime: 660-719
• Near-prime: 620-659
• Subprime: 580-619
• Deep subprime: 580 or lower

VantageScore uses a range of 300 to 850 and just four prime categories:

• Super-prime: 781-850
• Prime: 661-780
• Near-prime: 601-660
• Subprime: 300-600

Card companies and other lenders may tweak these categories a bit to fit their own business objectives. 

For many, these tweaks won’t make a difference in their ability to qualify for credit. If your score’s on the borderline, however, it may be considered near-prime with one lender and subprime with another, for example, depending on the categories that the lender uses.

Credit scores are a complex — and, I’d say, fascinating — subject. If you’re interested in how they work, you can do your own research and learn more. The more you know, the better prepared you’ll be to earn higher scores, which could help you qualify for the best cards and loan terms available.

Subprime cards occupy a special corner of the card marketplace. If you’re shopping for a card in this category, you’ll likely find some good options to consider. Most will share a few common characteristics, such as a higher rate, additional fees or charges, and/or a lower credit limit, compared with prime credit cards.

Higher Interest Rates

Interest rates for subprime cards tend to be higher than comparable rates for prime cards. I can understand why that may seem unfair; however, the higher rate isn’t a punishment for having subprime credit. 

Rather, its purpose is to compensate the card company for the higher risk of nonpayment when credit is extended to someone who, let’s be honest, has missed payments in the past. Without the higher rate, the company likely wouldn’t offer this type of card at all.

Keep in mind that if you never charge more in one month than you can afford to pay in full, you’ll never have to carry a balance, and you’ll never have to pay any interest at all.

Additional Fees and Charges

Like higher rates, additional fees and other charges are another way that card companies can earn a return when they make cards available to consumers with subprime credit. 

Examples of card fees may include annual fees, setup charges, monthly maintenance fees, fees for additional authorized users, cash advances, or late payments.

Fees that credit card issuers charge for subprime cards may include annual fees, setup charges, and monthly maintenance fees.

To avoid the most onerous and expensive fees, you should shop around for a subprime card and read the disclosures before you apply. Whenever you get a new card, a federal law known as the CARD Act limits fees to no more than 25% of the credit limit in the first year.

Lower Credit Limits

Along with higher rates and fees, subprime cards generally have lower initial credit limits compared with prime cards. Again, this isn’t a punishment for having subprime credit. The lower limit protects the card company from the higher risk of extending credit to someone who has missed payments in the past.

The lower limit also protects you, especially if you’re careful not to max out your cards, which could hurt your credit scores. Another confession: I actually don’t know what the credit limits for my cards are.

I’ve never come close enough to maxing out a card to need that information. Be careful about how much you charge, and one day you won’t need to know your credit limits.

Moreover, a low initial limit for a subprime card may not stay low for long. Your card company will likely review your account from time to time. If your payment history is good, you could be offered a higher limit. Don’t use it as an excuse to charge more than you can afford. Remember, your goal should be to pay your balance in full and on time every month.

When you find a subprime card that you like, the process to apply will be similar to the process to apply for a prime card. With either type, you’ll need to complete an application online or by phone.

Though the process is similar, the requirements to be approved may be a bit different for a subprime card compared with a prime card. For example, you may need to have a minimum credit score or a bank account, or you may need to provide documentation so the card company can verify your income.

These requirements may seem onerous, but they’re not intended to be burdensome. They’re intended to help you qualify even though you’ve had some problems with credit in the past.

Typical Credit Score Requirements

By definition, subprime cards are designed for and marketed to people who have subprime credit based on their relatively lower credit scores.

When you apply for a subprime card, some card companies may check only one of your scores; others may check two or three scores and use an average to decide whether to approve you for the card you want.

Examples of credit report errors that may hurt your credit scores include:

• Accounts that aren’t yours.
• Accounts that you closed but are still reported as open.
• Accounts that are reported as delinquent, even though you made payments on time.
• Duplicate accounts.
• Accounts with an incorrect credit limit or current balance.
• Mistakes that were corrected but then reappear on your credit report.

To improve your chances, you might want to request copies of your credit reports before you apply for a card. If you find any errors, notify the credit bureau and ask to have the error corrected.

Income Verification

Card companies sometimes ask how much income you earn. They do this mainly for two reasons: one, to try to predict whether you’ll have enough money to make payments, and two, to set an appropriate credit limit for your card. 

“Income” in this context doesn’t just mean your salary or wages. It also includes other funds that you receive on a regular, dependable basis, such as bonuses, tips, or commissions, gig income, interest or dividends, Social Security, long-term disability or workers’ compensation benefits, or scholarships or grants.

You may be asked to provide your paystubs, income tax returns, or other relevant documents as evidence of your earnings.

By now, you may be thinking that applying for a subprime card could be a good opportunity for you to get a card you like, even though it may have a higher rate and fees and a lower credit limit compared with a prime card. Alternatively, you may be thinking you’d rather hold off and rebuild your credit before you apply for a new card.

Either way, here are two other options you may want to consider:

Secured Credit Cards

A secured loan is one that is backed by an asset, such as a home or car, that you own and offer to your lender as an assurance that you will make your payment. If you don’t, you could lose your asset.

When you get a home mortgage, the asset, or security, is your home. When you get an auto loan, it’s your vehicle. When you get a secured card, it’s a bank account into which you deposit a sum that acts as security for your card. If you don’t make your payment, your card company can take your deposit to cover the amount, plus any associated fees.

Here is a look at some of the differences between secured and unsecured credit cards:

I’ve never had a secured card, but after six mortgages and one car loan, I can tell you that the risk of losing a valuable asset is a powerful incentive to make your payment for a loan.

Secured cards are designed to protect the card company’s interests. But they also benefit you because they enable card companies to offer you cards with more attractive rates and terms. As we’ve seen, that’s especially important if you have subprime credit.

Credit-Builder Loans

Most loans allow people to access money they borrow as soon as the loan closes. A so-called credit-builder loan is different. Rather than getting the funds upfront, you’ll have to make your payments first, and then — and only then — will you receive the funds.

If that seems like an odd arrangement, you’re not wrong. Because why would you make payments for a loan before you get the funds?

The answer is suggested by the name of this type of loan: its purpose is to help you improve your credit by demonstrating your ability to make payments even if you won’t receive the funds until later. Your payments should be reported to the credit bureaus so they’ll show up on your credit reports and be reflected in your credit scores.

If you miss a payment with a credit-builder loan, that, too, will be reported and reflected. Whether this type of loan will benefit your scores, and if so, how much, depends on how much you borrow, how many payments you make, whether you make your payment on time, and the state of your credit before and after you get the loan.

There’s no reason for anyone with prime credit to get a credit-builder loan. The benefit only makes sense for someone who has poor credit. There’s also a catch: credit-builder loans aren’t free, even though the lender has no risk in making this type of loan. Loan amounts, rates, fees and credit terms vary, so it’s always best to shop around and compare offers before you apply.

By now you’ve probably noticed a theme in the topic of subprime credit. That is, you may be able to get cards and other types of loans that you want with subprime credit, but if you’re approved, your lender or card company will likely charge you more to offset the increased risk.

You can look at that as a hardship or as an opportunity; the choice is yours.