PERSONAL FINANCE: HOW DO YOU FALL INTO SUBPRIME? 1

Credit Scores generated by the financial institution’s credit rating system range from 300 to 850, where the higher score denotes a better risk. A score below 600 is subprime. Although credit bureaus estimate that more than half of US residents have credit scores higher than 700 and will qualify for normal market rates on their loans, it is nevertheless important to find out how you can fall into the subprime category and be saddled with higher interests and more stringent loan provisions.

A score below 600 can be earned:

if you have less than 2 years of credit history

if your total loan payments from all your loans outstanding are more than 40% of your discretionary income (e.g., the more credit cards you have, the lower the credit score)

if you have filed for bankruptcy in the past (credit bureaus keep bankruptcy records for 10 years)

if you have had frequent late payments on your loans

if you have availed of loans more than three times in a year for more than two years in a row.

These are thumb rules and will vary from financial institution to financial institution, depending on each institution’s credit policies, aggressiveness, or willingness to take credit risks.

A borrower who is unable or unwilling to provide sufficient information (or the complete data that the financial institution requires) will also be given a subprime loan, i.e., a NINA (no income / no assets) or SISA (stated income / stated assets) loan. Basically, the borrower’s income and assets will not be actually verified by the bank (although employment will be verified). Sometimes, a borrower will deliberately go for a NINA / SISA loan to obtain a mortgage which would be beyond their rated / computed capacity to pay.

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