1 in 5 Americans have subprime credit – here’s what they can do

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Subprime credit is a huge and expensive problem, but you can fix it.

We tend to think that we are done with our grades after we leave school. But there is one note that follows you all your life: your credit score.

It’s a three-digit number that lenders use to gauge your level of financial responsibility. It determines if you qualify for credit cards and loans and what kind of interest rate you get. Sometimes owners, employers, and even mobile phone providers use it to decide whether to work with you.

Your credit score is important. But one in five Americans has a subprime score that scares lenders, according to the latest Consumer Financial Protection Bureau (CFPB) consumer credit card market research. There is good news, however, that you are not stuck there forever.

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What is a subprime credit score?

What is considered a “good” or “bad” credit score depends on the scale you use. The two most common credit scoring models are the FICO score and the VantageScore. Both use a scale from 300 to 850 with a higher number indicating a greater degree of financial responsibility.

Each lender has their own criteria for which score belongs to which level, but the CFPB study breaks it down as follows:

Credit score level

Credit score range

Superprime

720–85

First

660-719

Close to the premium

620-659

Subprime

580-619

Deep subprime

300-579

Data source: Bureau of Consumer Financial Protection.

According to the CFPB study, about 6% of the adult American population has subprime credit, while 13% have deep subprime credit. These people will have a hard time taking new loans or opening new credit cards – and if approved, they will pay much higher interest rates than borrowers with near-premium credit, credit cards, and credit cards. premium or superprime to reflect their increased default risk.

What Determines Your Credit Score?

Your credit score is based on the information in your credit reports. Each credit scoring model weighs these factors differently, but they all look at more or less the same things.

Your payment history is always the most important factor, and a single late payment can drop a great FICO score by 100 points or more. Your credit score measures the number of late payments on your file, the late payments and when they are recent. Each late payment remains on your file for seven years.

Your credit utilization rate is almost as important as your payment history. It is the ratio between the amount of credit you use and the amount you have available. If you have a credit card with a limit of $ 10,000 and you regularly use $ 2,000 per month, your credit utilization rate on that card would be 20%. Strive to keep your credit utilization rate below 30%. A higher ratio indicates heavy reliance on credit, which worries lenders.

Here are other factors that influence your credit score:

  • The age of your oldest and most recent credit accounts and the average age of your account.
  • The types of credit you have on your account. A mix of installment debt – debt with a predictable monthly payment, like a car loan or personal loan – and revolving debt, like credit cards, is preferable.
  • New Credit examines the number of serious credit inquiries on your report. Each of these affects your credit score slightly, but most credit score models treat inquiries that occur within 14 to 30 days as one request.

How to improve your credit?

Improving subprime credit is possible, but it takes time. Credit Score Models were designed to provide a long-term view of how you manage your finances. It will therefore take several months, or even years, to see a significant improvement in your score. It will be worth it because you will have access to better credit cards and better interest rates on loans.

Here is how you can do it.

Pay your bills on time

The most important thing you can do is always pay your bills on time.

If you don’t qualify for a great credit card, you can get a secured card to start rebuilding your credit. These cards have low credit limits – usually a few hundred dollars – equal to a security deposit you make when you open the card. The card issuer reports your monthly payments to the credit bureaus, and full, on-time payments help improve your score. If you close the secure card, the issuer will refund your security deposit, provided you do not have an outstanding balance.

Maintain low usage

Try to keep your credit utilization rate as low as possible, but above 0%. If you’re struggling with this, consider paying your credit card bill twice a month. The card issuer only reports your final balance at the end of the month to the credit bureaus, so paying twice allows you to spend more without being penalized for using too much credit.

Don’t apply for new credit often

Limit how often you apply for new credit. When you’re on the hunt for a new loan or credit card, submit all of your requests within weeks. This minimizes the effect of difficult surveys on your score. If you are refused, do not apply again the following month. Wait several months before trying again. The same is true if you close a credit card account. This lowers the average age of your account, so don’t close more than one credit account every six months.

Improving your credit score requires significant changes in the way you manage your money. But, in the long run, it will likely save you money – and it will certainly save you stress the next time you apply for a credit card, job, apartment, or cell phone plan.

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