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Near-prime borrowers don't yet have the credit score to qualify for the best, or "prime," interest rates, but they are certainly inching their way closer.
If you carry a large credit card balance in comparison to your credit limit (also known as having a high credit utilization rate) or your credit report shows a series of late or missed bill payments from the past, you may classify as being a near-prime borrower.
It's important to know your borrower risk profile in general because lenders use it to assess how likely you are to pay back your loan if they approve you for new credit. Your borrower type can be classified as one of the following: super-prime, prime, near-prime, subprime and deep subprime.
People with near-prime credit fall between prime and subprime. These borrowers are close enough to "prime" territory that, with consistent habits, it's very possible to improve their approval odds for the best credit cards and loans with the most favorable terms.
The federal Consumer Financial Protection Bureau (CFPB) Consumer Credit Panel defines a near-prime borrower as having a credit score between 620 and 659.
If this is you, know that you have the opportunity to either improve your credit or fall further behind. Borrowers on the lower end near 620 are bordering subprime territory, while those on the higher end near 659 are almost considered prime borrowers. The difference between being either is significant: lenders have a greater confidence in extending you credit as a prime borrower than as a subprime borrower because you pose less of a risk of defaulting.
Note that credit score ranges for borrower classifications vary across lenders and organizations. For example, Experian calls this category of borrowers "nonprime" and defines them as having a credit score between 601 and 660.
Whatever the case, you can assume that those with fair or average credit on the higher end are ideally near-prime consumers. Using estimates from Experian, a fair or average credit score falls within 580 to 669 on the FICO scoring model and 601 to 660 on the VantageScore model.
While a credit score of 659 isn't great, it's enough to qualify for some credit cards and loans. You'll likely be charged higher fees and interest rates. According to Experian, consumers with FICO® Scores in the good range (670-739) or higher are more likely to offered significantly better borrowing terms. Since a score of 659 is very close to entering good, or "prime," territory, with just a little bit of work you can have open the doors to a wider range of credit.
If you are a near-prime borrower, you may have already built up some credit history by starting off with a secured credit card. Secured cards are for beginners as they don't require a high credit score to qualify, but users typically have to make a security deposit upfront that acts as their credit limit.
For near-prime cardholders who are not yet considered a "prime" borrower but are working their way there, they can try swapping in their secured card for a traditional credit card. As a near-prime borrower, you want to look for a credit card that is easy to use and pay off. Remember, your main goal is to improve your credit score.
Here are some credit cards to take advantage of if you have fair or average credit as a near-prime borrower:
- Best for no fees: Petal® 2 "Cash Back, No Fees" Visa® Credit Card
- Best for cash back: Capital One® QuicksilverOne® Cash Rewards Credit Card
- Best for travel: Capital One® Platinum Credit Card
- Best for college students: Deserve® EDU Mastercard for Students
With something like the Petal 2 Visa Credit Card, you are charged no fees whatsoever* and you are rewarded when you make your bill payments on time: cardholders earn 1% cash back on eligible purchases, 1.5% after making 12 on-time monthly payments and 2% to 10% cash back from select merchants.
On the other hand, the Capital One QuicksilverOne Cash Rewards Credit Card comes with a $39 annual fee, but offers a flat-rate 1.5% cash back on all purchases. It also offers a similar incentive for good behavior: cardholders can get access to a higher credit limit after making their first five monthly payments on time.
If you are looking to eventually upgrade to another card in the Capital One family, the Capital One Platinum Credit Card doesn't have an annual fee, so that may make it easier. The card doesn't come with a rewards program, but you do receive travel benefits and the same opportunity to get a higher credit limit after paying your monthly bills on time.
If your credit score falls within the near-prime ranges we listed above, you'll want to take notice. With good financial habits, you have the potential to rise to prime credit.
Having fair or average credit as a near-prime borrower gives you more access to lending as opposed to being subprime, but it still has its limitations, such as being denied for new credit or getting approved but for less favorable loan and interest terms. Having prime credit helps with both of these scenarios, and it makes your credit card choices less limited.
Below are just a few ways you can work your way toward being a prime borrower. Follow some of these easy tips to help raise your credit score.
- Make on-time payments: The most important factor of your credit score is your payment history, so paying on time is key. If you have a hard time remembering to pay your monthly bills on time, set up autopay so you don't have to worry about missing another due date.
- Pay your bills in full: Unless you can only afford the minimum payment on your bills (which may very well be the case during the current recession), aim to pay your bill in full each month. This will prevent you carrying a balance on your credit card, which becomes expensive with interest, and it keeps a low utilization rate (the percentage of your total credit limit you're using).
- Don't open too many accounts at once: Opening and using a credit card is necessary to build credit, but you don't want to apply to too many in a short amount of time. This is because any application for new credit, whether it's for a credit card or a loan, results in a hard inquiry on your credit report. Hard inquiries temporarily lower your credit score about five points, so it's important to not have multiple inquiries at the same time. Applying for a bunch of credit in a short timespan may also flag to lenders that you won't be able to make your payments if approved. Before applying for a new credit card, shop around with preapproval or prequalification tools to find the best one for you while not risking your credit score.
- Monitor your credit: An easy way to improve your credit score is to track it. Signing up for a credit monitoring service can help by keeping you informed when your credit score increases or decreases. These services also send you alerts of any potential fraud made on your card. You can decide between free and paid credit monitoring services, depending on the type of coverage you are looking for.
The good news for near-prime borrowers is that you've graduated from subprime, and, while you're not quite "prime" yet, you hold the potential to be.
Focus on improving your credit score by following the tips above and only open new credit cards that you know you can afford and make timely bill payments each month.
Information about the Capital One® QuicksilverOne® Cash Rewards Credit Card, and Capital One® Platinum Credit Card has been collected independently by CNBC and has not been reviewed or provided by the issuer of the cards prior to publication.
Petal 2 Visa Credit Card issued by WebBank, Member FDIC.
*The regular APR variable for the Petal® 2 "Cash Back, No Fees" Visa® Credit Card currently range from 12.99% - 26.99%