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Why Deep Sub-Prime Borrowers Get More Interest Than Super-Prime

By on March 9, 2021 0

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Editor’s Note: The APYs listed in this article are current at the time of publication. They can fluctuate (up or down) based on changes in the Fed’s rate. CNBC will update as changes are made public.

Credit scores provide lenders with insight into your financial history, helping them determine how likely you are to repay your loans. The level of risk you fall into influences the interest rates you receive on financial products, from credit cards to mortgages.

The more risk you pose, the higher the interest rate you receive, which can lead to substantial interest charges over the life of a loan. High risk borrowers, considered the riskiest, can incur interest charges more than double the amount of high risk borrowers assuming an average credit card balance of $ 6,194 and monthly payments of $ 200.

Below, we break down the average interest rate for each category of credit risk and look at the amount of interest you can incur on credit card debt.

Credit Score Risk Categories

The CFPB consumer credit panel ranks the five different types of borrowers by credit score.

  • Deep subprime: Credit scores less than 580
  • Subprime: Credit scores from 580 to 619
  • Near the premium: Credit scores from 620 to 659
  • First: Credit scores from 660 to 719
  • Super bonus: Credit scores of 720 or higher

Keep in mind that these categorizations may vary by organization. A credit score of 650 is considered near best by the CFPB, but the credit bureau Experian classifies 650 as subprime.

Average interest rate by borrower’s risk profile

Lenders assign interest rates based on your credit rating and risk profile, as well as other factors, including income and monthly housing payments. The CFPB Consumer Credit Cards Market report tracked the effective interest rates for revolving credit card accounts, which has been calculated as the total amount of all interest charges paid over the course of the period. ‘one year divided by the total end-of-cycle balance.

Here are the effective interest rates that each type of borrower received in 2018:

  • Deep subprime: 21.50%
  • Subprime: 20.40%
  • Near the premium: 19.10%
  • First: 16.80%
  • Super bonus: 12.50%
  • Mean: 15.60%

Deep sub-prime borrowers receive interest rates on credit cards that are 9% higher than super-prime borrowers. The rate difference can result in high interest charges when subprime borrowers have a balance on their credit card, which we explain in more detail below.

Average interest charges by borrower’s risk profile

Since the average interest rate is higher for deep subprime and subprime borrowers, they incur higher interest charges compared to borrowers with close credit, prime, and super-prime.

To show the impact of a high interest rate, we used the average interest rates by borrower’s risk profile to calculate the estimated interest charges that each type of borrower may incur. We assumed borrowers make monthly payments of $ 200 on the average credit card balance of $ 6,194, according to Experian.

Here’s how much money each type of borrower would pay in interest alone and how long it would take to pay off the debt:

  • Deep subprime: $ 2,922 for 46 months
  • Subprime: $ 2,676 for 45 months
  • Near the premium: $ 2,407 for 44 months
  • First: $ 1,983 for 41 months
  • Super bonus: $ 1,323 for 38 months
  • Mean: $ 1,783 for 40 months

While the average time to pay off debt isn’t that different – 38 to 46 months – borrowers can see a substantial difference in the cost of maintaining a $ 6,194 balance from month to month.

High risk borrowers may incur interest charges more than double (an additional $ 1,599) the amount of high risk borrowers. These additional costs might be better spent on household expenses, such as groceries, gasoline, and utilities, or for savings.

At the end of the line

Interest charges on credit cards can accumulate over time, whether you are classified as a low risk or a high risk borrower. To completely avoid interest charges, pay off your statement balance in full each billing cycle.

That said, not everyone can afford to pay off their entire balance. As a result, you can end up with hundreds or thousands of dollars each month resulting in high interest charges, especially if you are a subprime or subprime borrower.

In order to pay off your debts, you can consider using a balance transfer card, requesting a loan from a family member or close friend, or taking out a personal loan. The latter two options may be better suited if you have less than stellar credit, as balance transfer cards are often only for borrowers with good or excellent credit. After all, borrowing money from family and friends doesn’t require a credit check, and personal loans often have milder credit requirements.

Once you’ve paid off your debts, consider putting extra money into a high-yield savings account to earn competitive interest. For example, depositing $ 1,000 into the Vio Bank High Yield online savings account, which earns 0.83% APY, could earn you more interest in a year compared to the national APY average of 0.06%. .

Information about Vio Bank High Yield Online Savings Account was independently collected by CNBC and was not reviewed or provided by the bank prior to posting.

Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.