By David Pilley on August 26, 2010
.jpg.aspx?width=75&height=75) To an extent, your credit score is as important as your education. If you have graduated from high school and have earned a degree at a prestigious college, you may look like a good candidate for a good job with high salary, health care benefits, and the lot. In comparison, if you have a good credit score, you may look like a good candidate to receive a large loan.
The Fair Isaac Corporation, or FICO, has the most widely used credit score model in the US. The range of possible FICO scores is between 300 and 850. If your score is 620 or lower, you are considered subprime. This means you are unlikely to receive a prime loan because lenders see you as a risk of not paying back the loan. It doesn’t mean you can’t get a mortgage or an auto loan or a new credit card; however, the loan you do receive will involve more risk.
To be considered subprime, your FICO score has to be 620 or lower. This isn’t just some random number being pulled out of the air. The score involves your credit history as well as your current debt. Some reasons your score may be at 620 or below include two or more late loan payments within the past year; a judgment, foreclosure, repossession, or non-payment of a loan; bankruptcy in the past five years; high default probability evidenced by your credit score; or even inaccuracy of your credit line data. If any of these apply to you, you may get a subprime FICO score.
Because someone with a subprime lender is viewed as riskier than prime borrowers, a subprime loan will have a premium. A subprime mortgage loan will have a higher interest rate than a prime loan, and a credit card obtained by a subprime loan will have higher late fees. Subprime mortgage loans may come with similar payment options as prime loans, such as “interest-only payments” (allowing you to pay just interest for a period of time), a “pay-option” (allowing you to choose your monthly payment), or a “hybrid” (a mortgage loan having an initial fixed interest rate that eventually becomes an adjustable rate). However, you are classified as “subprime,” meaning there is some expectation that you will eventually have trouble.
Here’s the thing about a subprime loan. You get one when your credit score is low. But, if you make your payments on time and eventually pay back the entire loan, your credit score will go up, meaning you will be eligible for a prime loan in the future. If you can pay it back, a subprime loan can be a boon to you, showing lenders that you are responsible with lent money.
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