“Subprime” is really a general term that describes credit items that do not require a good credit score and borrowers who don't put on a good credit score scores. The specific definition or threshold can vary with respect to the creditor or lender, but a subprime borrower is generally considered one who has a FICO® Score☉ below 670—in the poor to fair score range.
About 30% of U.S. consumers have a subprime credit score, according to Experian data in the first quarter of 2023, that is a decrease from 34% in 2023. A high level subprime borrower, you may have more difficulty qualifying for a loan or charge card with favorable rates and terms. However, you may still have options, and you can do something to improve your credit to become “prime” borrower with increased lender-desirable credit scores.
Who Is recognized as a Subprime Borrower?
A subprime borrower is anyone who doesn't have adequate credit to qualify for a creditor's prime rates and terms. You might be a subprime borrower if you:
- Recently missed payments on credit accounts.
- Had a recent charge-off, repossession or foreclosure.
- Filed for bankruptcy in the last many years.
- Have a higher debt-to-income ratio.
- Are new to credit and haven't established a good (or any) score.
However, subprime is really a moving target. Each lender defines subprime and prime depending on their lending strategies and business goals. In addition to prime and subprime, some may use more nuanced terms, for example deep subprime, non-prime, near-prime and super-prime.
What's more, different lenders define subprime using different credit scoring systems, including multiple versions of the FICO® Score or VantageScore® as well as custom scores created by the lender.
What Does Subprime Credit Mean?
Subprime credit may refer to the loans and credit products that financial institutions offer to subprime borrowers. These often have higher rates of interest, more fees minimizing borrowing limits than credit accounts for prime borrowers.
While subprime and prime are industry terms, you may see subprime credit accounts advertised as makes up about individuals with no or a bad credit score, or people who are rebuilding their credit. These can include:
Subprime Credit Cards
Subprime charge cards include secured credit cards, which need you to send the issuer a refundable security deposit to spread out your account, and unsecured cards for those who have a bad credit score. These cards may have annual or monthly fees and tend to lack generous cardholder benefits or rewards.
Subprime Mortgages
Subprime mortgages are home loans that may have higher settlement costs, deposit and rates of interest, as creditors take on more risk once they lend to borrowers with lower credit ratings. Subprime borrowers might be more likely to be offered adjustable-rate mortgages, which may be riskier than fixed-rate loans because their interest rate could increase in the near future.
Subprime Auto Loans
While you may be able to get an auto loan with bad credit, subprime auto lenders may require a higher down payment and charge a comparatively high interest rate. You may even get a longer repayment term, which can decrease your payment per month but results in paying more interest overall.
What's the main difference Between Subprime and Prime?
The straightforward answer is that prime borrowers have better credit ratings than subprime borrowers.
While some lenders offer loans to individuals in either category, the borrowed funds offers for prime borrowers will probably have lower rates of interest, fewer fees and better loan limits. There are also lenders that concentrate on particular segments of borrowers and focus on lending to either subprime or prime borrowers.
How to Improve a Subprime Credit Score
If you discover your credit scores in the subprime range, know that they do not have to be stuck there forever. Whether you're a new comer to credit or have an undesirable credit score because of negative marks inside your credit history, you can do something to improve your score.
- Make bill payments on time. Missing a payment by 30 days can add a overtime for your credit rating, which could negatively impact your credit score for up to seven years.
- Pay down charge card balances. High balances can lead to a higher credit utilization ratio, that is key point inside your score.
- Add positive information for your credit report. Making loan and charge card payments on time will help you add positive information for your credit report. You might take out a credit-builder loan or secured charge card if you don't have a credit account. And use Experian Boost®o to include phone, utility and popular streaming service payments to your Experian credit history.
- Don't apply for too many new accounts. Each credit application can lead to a brand new hard inquiry, which may hurt your score whether or not the creditor declines the application. However, you can comparison shop for certain types of loans without having done additional damage to your score.
The precise amount of time it requires to move from subprime to prime is determined by your specific credit report.
Monitor Your Progress
Checking and monitoring your credit can give you more insight into what's impacting your credit and enables you to track how well you're progressing. Experian gives you free credit score and score monitoring with real-time alerts and an updated report every 30 days. You can also learn about the specific factors that are impacting your FICO® Score so you can concentrate on the factors that may be most important to improving your score.