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Subprime is a general financial term used to describe borrowing and lending to a person with no credit or credit that is less than perfect. The term subprime credit relates to the risks associated with borrowing and lending to someone with a blemished credit history. Subprime credit is offered to borrowers who have data on their credit history reports that may show increased risk for lenders.
Those with lower credit scores are typically classified in the subprime credit category. Defaulting on a loan, missing payments, excessive borrowing, and bankruptcy can all lead to subprime credit. Offers that target those who fall into this category provide an opportunity for people who have bad credit or no credit to borrow money. Borrowers who have a blemished credit history still have borrowing options, but there are often heavy fees and costs associated with subprime credit borrowing.
Borrowers who have less than favorable credit can turn their credit report around by applying for and getting approved for subprime credit offers. These offers can include a credit card or a loan, which are both good first steps towards improving credit scores. Showing a good track record of paying back debt increases the creditworthiness of the candidate and can improve credit history.
Subprime credit cards can be the key to turning bad or no credit into a favorable good credit history, but there are some key differences of note between prime and subprime credit cards. Typically, the differences are in the fees, perks and benefits associated with being a cardholder. Prime cards offer lower fees and increased perks, while subprime cards offer no perks and high fees. The risks associated with lending to those with blemished credit are balanced by the heavy fees associated with being a card holder.
Subprime loans come with a higher risk than prime loans for financial institutions. All financial institutions set standards for determining the risk associated with each borrower, and depending on the risk, the borrower is then categorized. The category is used to determine creditworthiness in terms of being granted credit and at what rate.
Financial lenders offer mortgages, credit cards, and loans geared to those with subprime credit scores. Subprime offers, because of the prior credit history blemishes, often come with increased annual rates, higher finance charges and lower charging limits associated with the borrowing contract. As borrowers show that they can pay off their debts as outlined in their borrowing contract, these high fees can decrease.
Once a borrower has a satisfactory and consistent record of repayment, his or her credit score will begin to improve. After time, borrowers may move from the subprime category to the prime category. A change in categories from subprime to prime means lower rates, more borrowing options and fewer fees.