What is Subprime Credit? How a Poor Credit Score Complicates Borrowing

Subprime refers to a range of credit scores from fair to poor — and even very poor. You don’t just accidentally achieve deep subprime credit scores. Typically, a lot of individual actions contribute to a very poor score, including possibly missing your payments, defaulting on a loan, or a financially devastating emergency.

Subprime credit refers to a credit score that indicates a higher risk to lenders due to a history of missed payments, defaults, or other negative financial behaviors.

But don’t hang your head too low because even if your score’s wallowing in the mud, there is a way out. You can claw your way back to high ground using some smart money moves. 

I’m going to slice and dice what subprime credit is all about. More importantly, I’ll show you how to haul yourself out of your financial mud and back onto the green pastures of good credit. All you have to do is keep on reading.

If you have subprime credit, it’s super important to know just where you stand because it tells the lenders whether you’re a safe bet or not. 

FICO scores for subprime credit range from 669 down to 580. If you are below 580, then that’s deep subprime territory. These scores weigh you down when it comes time to borrow money.

How Lenders View Borrowers with Subprime Credit

Lenders know that every time a person with subprime credit comes knocking on the door, there is a higher default risk on a loan. Naturally, that’s a red flag, but here’s the irony: Lenders can potentially earn more profit from subprime borrowers. 

They can jack up your interest rates and fees, making lending to riskier folks worthwhile if creditors play their cards right.

Lenders’ need for profit doesn’t generally make them careless. Oh no, they’re really cautious with subprime borrowers. They usually go the extra mile to check up on your credit history and score before offering you a deal. Creditors know that folks with subprime credit who pay their bills help cover the losses of those who don’t.

If creditors feel that you are too risky, they will either turn your application down or offer you really strict terms. Subprime lenders walk a tightrope between making and losing money, ensuring they’re not left holding the bag if things go south.

While lenders are not exactly shy about dealing with subprime borrowers, they certainly take steps to protect themselves. That means your loan might come with all sorts of strings attached, including higher rates, shorter terms, or bigger down payments. All these measures attempt to keep the lender safe from losses.

Similarly, credit card issuers create products for subprime consumers that feature low credit limits, high APRs, extra fees, and, in some cases, security deposits.

Collateral and Down Payments Can Mitigate Risk 

Subprime lenders need to trust that you will pay up. They want something to hold on to — collateral. That could mean your car, house, or some other thing of value they can grab for themselves in case you cannot pay up. 

Collateral allows lenders to sleep better, knowing they have something to sell off in case you can’t keep up with the payments. 

Another way lenders safeguard themselves against bad credit borrowers is by demanding a larger down payment. The larger the payment, the less risk to them because they’re getting some of their money back right off the bat.

To you, it may mean a deeper dig into your wallet, but it does help sweeten the deal some when your credit isn’t exactly top-notch. 

Why Lenders Charge Subprime Borrowers Higher Interest Rates 

With subprime loans, higher interest rates aren’t just for fun. They make up for the higher overall risk that you bring into the deal. In other words, if a lender thinks you may fail to pay, they jack up your interest rate to make sure they still come out ahead. 

It is like them saying, “We’re afraid you’re going to screw up, so we’ll take more just in case.” That is why you will often see nose-bleed interest rates attached to subprime loans — especially in comparison to what someone with good credit gets.

In the end, it all comes down to hedging their bets. The higher your interest rate, the more the lender protects itself from risk, even if it means your payments end up taking a big chunk of your paycheck.

All these precautions help keep lenders out of the financial quicksand. Whether by demanding collateral or more cash up front, they make sure they’re sitting in the driver’s seat, even if your credit is running on fumes.

In the loan and credit card universe, subprime credit triggers various obstacles for you to deal with. These high-risk products may put quick cash into your hands, but they come with some pretty tangled strings attached. 

Subprime Loans

If you have subprime credit, personal loans will come at you like a high-speed locomotive. These loans aren’t only high-risk for you; they’re high-risk for the lenders, too, and so they whack you with excessive interest rates and unforgiving terms as friendly as an electrified fence. You’ll pay more over time, and the terms may sting something fierce.

Now, these subprime loans are easier than ever to get, thanks in part to online loan-matching services specializing in dealing with folks whose credit could be more sparkly clean. They’ll hook you up with a lender, but that doesn’t mean you’re sitting pretty. In fact, if you don’t repay these loans, you’ll sink deeper into debt.

“If you don’t pay attention, some subprime loans will have you paying through the nose for years on end.”

If you don’t pay attention, some subprime loans will have you paying through the nose for years on end. I’m talking about borrowing a dollar and having to pay back three. You better know what you are getting into before signing on the dotted line. 

Keep one eye on the interest rate and another on the repayment terms because neither of them is going to win any beauty contests.

Credit Cards for Low Credit Scores 

If you’re thinking you’ll get a good unsecured credit card despite your low credit scores, better think again. The cards on offer have fees higher than Mount Everest, and the credit limits? As low as the Mariana Trench. You’ll be paying more to borrow less, and the math may leave you curled up on the couch in a fetal position.

A way to make things a little less painful is to look into secured cards. These require a cash deposit upfront, but if you play your cards right (er, sorry), they allow you to rebuild credit. That deposit reassures the lender, and if you make payments by the due date, you may soon graduate with a regular credit card. I’ll have more to say about secured cards below.

But let’s get one thing straight: Whether it is a secured card or a subprime unsecured one, the fees will come at you from all directions. 

Auto Loans for High-Risk Borrowers

Need a car but have bad credit? You may have to turn to high-risk auto loans that will have you making expensive bi-weekly or monthly payments. Sure, these loans may get you behind the wheel, but the price tag is heavy. 

Longer repayment periods may sound good, to begin with, but all that means is you are going to pay longer and cough up more interest. 

Here is a chart showing the average auto loan interest rates in Q2 2024 based on credit tiers:

Now, if you need cash and already own a vehicle, you may qualify for a car title loan. That’s where you pledge your car’s title as collateral. It’s a deal that only makes sense if you’re desperate. And if you fail to make just one payment, the repo agent swoops in, grabbing your car.

The auto loans for subprime borrowers may have interest rates that will make your wallet beg for mercy. Before you sign the loan contract, be sure you aren’t heading down the road to nowhere. 

If your credit score has sunk low, you’re going to need some strategies to pull yourself out of the hole. 

Pay Your Bills on Time

First things first: Pay your bills on time if you want to climb out of subprime territory. There are just no two ways about it — timely payments are the biggest factor in improving your credit score. 

You’d be taking a chainsaw to your credit score if you were significantly late making a payment. Pay on time, and you plant the seeds for far better credit later on. 

Learning how to boost your score will allow you to stop relying on high-risk loans and credit cards that’ll gobble up your money.

Now, I know keeping up with multiple due dates each month can feel like trying to herd cats, but you can take steps to solve the problem. For example, you can set up automatic payments so that you never forget to pay. Or use personal financial software like Quicken to manage your expenses. These tools are watchdogs for your wallet, making sure nothing slips through the cracks.

And here’s a little tidbit: Even when you have missed a payment, all is not lost. As long as you make that payment within 30 days, it will not be reported to the credit bureaus, which means your credit score won’t get dinged. Just don’t screw around — if you’re running late, pay the bill as soon as you can!

Reducing Credit Card Balances 

Another biggie in terms of boosting your credit score is lowering your credit card balances. It involves something called the credit utilization ratio, which is how much of your available credit line you’re using. If you max out, your score goes down.

This chart shows an example credit utilization ratio for a borrower with a $10,000 credit limit across three credit cards:

Balance transfers can help you crush your balances. Many cards offer new cardmembers introductory 0% interest promotions for six to 18 months, giving you a chance to pay off what you owe without interest eating your lunch. Just be careful — the interest rate will pop right back up once the introductory period takes its curtain call.

Keep your credit utilization ratio below 30% and it’s going to help your score climb.

If balance transfers don’t suit you, consider getting a consolidation loan. This type of loan lets you bundle all your debts into one loan with a lower interest rate. Then, throw your credit cards into a sock drawer and forget about them until you pay off your loan. That way, you can get a fresh start without racking up more debt. 

Another way to smash those credit card balances is to repay them directly using either the Avalanche or Snowball method. Avalanche has you first pay off the cards with the highest interest, while Snowball gets those little balances out of the way ahead of the bigger ones. Take your pick and start knocking down that debt.

Checking Your Credit Report for Errors 

Occasionally, your credit score may be torpedoed through no fault of your own, and that’s why checking your credit report is important. You may find mistakes that are pushing your score down, but if you catch them early, you can patch things up before your ship sinks. 

You wouldn’t let a fox near your chickens. Neither can you afford mistakes lurking in your credit report. Lucky for you, you’re entitled to free copies of your credit reports from each of the big three credit bureaus: Experian, Equifax, and TransUnion. If you see something fishy in a report, you have the right to dispute it. 

You can do this yourself or hire a credit repair agency to do the heavy lifting. Just make sure to keep records of everything. 

Whether you’re correcting inaccuracies yourself or with some assistance, getting those errors cleared up can boost your credit score faster than a speeding bullet. A clean credit report is one of the surest ways toward achieving a good credit territory.

When you inhabit Subprime City, finding better options than high-interest loans and lousy credit cards is just about as important as a good pair of reading glasses at the library. Looking into alternatives might save you from getting tied up in a mess of debt. 

Secured Credit Cards

If rebuilding credit is your aim, you may find that a secured credit card is the perfect tool. One of the nice things about these cards is that your cash deposit gets you past the door regardless of your credit profile.

This chart highlights a few of the differences between secured and unsecured credit cards:

Because a deposit is necessary, secured cards tend to have fewer fees and lower interest rates than the zaniest subprime deals, so it’s a less expensive option when you’re attempting to emerge from the bad credit cave.

These cards not only give you a leg up, but if you keep up with your payments, your credit score will start to improve, and you may be sporting an unsecured card within the year.

Credit Unions

Wouldn’t you love a friendlier place from which to borrow? Then, toddle on over to your local credit union. They’re like a small-town general store compared to the big national bank — they know their folks and tend to give better deals, especially for members with lower credit scores.

For example, they offer credit-builder loans, in which the money from the loan is locked up in an account until you repay the debt. Every payment you make gets reported to the three credit bureaus, so your timely payments lift your score.

Credit unions also offer Payday Alternative Loans (PALs) that let you borrow modest amounts at reasonable rates. 

Credit unions are member-owned, so they aren’t out to nickel-and-dime you. If you’re serious about improving your credit, get cozy with your local credit union — they can help you get on the right path without breaking the bank.

Peer-to-Peer Lending Options 

Peer-to-peer (P2P) lending lets you use an online portal to borrow directly from other people who are willing to take a chance on you. These loans usually have relatively attractive terms and are easier to get.

P2P borrowing can mean not getting stuck with sky-high interest rates or fees. P2P lenders aren’t necessarily fixated on your credit score. They may take a chance on you, even if your credit has seen better days. 

A subprime credit score warns creditors that you’re a risky bet, like a bull in a china shop. They know how to protect themselves with higher rates, stricter terms, and more hoops to jump through. 

But don’t worry — if you’re serious about improving your credit, there are plenty of ways to reach the promised land where good credit scores abound.