PERSONAL FINANCE: HOW DO YOU FALL INTO SUBPRIME? 2

In addition to the credit score (or FICO score) where a score below 600 will drop you into the subprime category, financial institutions also do a credit risk rating where a borrower is evaluated according to a scale of 1 to 9, the lower scale being the better risk and deserving of lower interest.

To the number is attached a letter modifier: R (revolving as in credit cards) or I (installment as in a house or car loan).

Numbers 1 through 6 indicate the number of months you are habitually in arrears or late in payments, the number 1 declaring that you usually pay within a month. A credit risk rating of 7 tells the loan officer that you have consolidated your debts (i.e., some refinancing). A rating of 8 means the loan has been repaid through repossession. The dreaded 9 rating means you have been in default.

A credit risk rating of 5 and higher will drop you into subprime and a high interest rate. Interest rates assigned to the higher scales are discretionary (perhaps, how badly or well the day is going for the loan officer on your case).

A credit risk rating of “0″ (zero) is also given which means that the financial institution has not been able to obtain a history of debt service of enough length to make a judgment on how behaved a borrower you have been. However, the financial institution does not give you the benefit of the doubt and considers you unreliable (guilty until proven innocent) and will place you in the subprime category.

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