| Are you a subprime borrower? |
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"Anyone is a candidate for
subprime," concurs Adam K. Levin, president and CEO of Credit.com,
and the former state consumer affairs director in New Jersey. "You
can be subprime simply because there are errors in your [credit]
report and you're not looking at it."
Divorce can also be a factor
in gaining subprime status. "One spouse ends up with a responsibility by
decree to pay the bills," Levin explains. "But there's such an anger
factor. They say, 'I don't care if I ruin myself, as long as I take my partner
down!'"
He has even known millionaires
who don't like to have credit cards and would be considered subprime
borrowers. "It's shocking to realize how many professionals
don't think about credit."
In other words, no one group or individual is immune from the subprime
bug.
Loan (and groan) time
Living
with a subprime label is costly. In fact, when mortgage and car loan rates are
coming in higher than the best rates, it can "cost literally hundreds of
thousands of dollars over the course of your lifetime," says Richard M. Krawczyk,
Ph.D., publisher of The
Financial Fitness Tips.com Report newsletter.
The process of obtaining an auto loan as a subprime
borrower is relatively easy. "You've probably heard those kinds
of ads on the radio: 'Get into a new car, regardless of credit!'"
Gumbinger says. "But you'll note that they don't mention the
interest rate, which can be well into the 20 percent-plus range."
Credit cards also fall into that "available but expensive"
category, he says. For a traditional card, the credit limit would
be low and limited.
Getting
a home mortgage is a bigger hurdle as a subprime borrower, but because it's a
loan secured by an asset that may actually increase in value (unlike that asset
you drive off the auto lot), obtaining one may be easier than expected, Gumbinger
explains.
Ballentine, who avoids using the term subprime, notes
that loan products for this market are, often, just slightly higher
than the A-rated borrowers get, to the tune of a quarter or half
of 1 percent. But those likely on the cusp of qualifying for prime
rates should try to get over that hump before accepting a loan,
says Emily Davidson, director of communications at Credit.com. "People
will say, 'I have a 660 credit score; I'm fine.' Then they go in
for a loan," she adds, and are unpleasantly surprised. Credit
scores aren't always calculated in the same way; after all, there
are three credit bureaus offering different snapshots of one's credit
history, she reminds. "If you're a 650, definitely work on
being a 700." Not only might a cheaper interest rate come into
play, but there may be more loan product choices, Gumbinger adds.
Before
signing on the dotted line
"People shop more for a loaf of bread than they do for loans,"
Ballentine says. But comparison shopping is crucial, particularly
for those who may get labeled subprime. "Don't just settle
for the first loan you see," he advises.
And don't concern yourself only with loan rates. Loan
terms can be very important. Prepayment penalties, for instance,
can prevent borrowers from building a credit bridge to qualify for
better rates.
And rebuilding your credit is a project anyone can
undertake. "Depending on the depth of the credit pit you're
in, a borrower can usually move up the credit scale by making payments
on time for about two years," Gumbinger says. Negotiating with
the current lender, or taking advantage of an offer from another
lender that comes in, can result in a lower interest rate.
Krawczyk has seen
even quicker credit turns for the better. "You can go from subprime to prime
in as little as 90 days," he says. It's a credit climb worth taking. Melissa
Ezarik is a Connecticut-based freelance writer.
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