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More than a third of Americans have a credit score that's considered subprime—here's what that means

CNBC Select reviews what it means to be subprime, how subprime credit cards work and tips on improving your credit score.

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If you have less-than-stellar credit, you may be classified as someone who is "subprime," which means your credit score is lower than what's required to get the best, or "prime," interest rates.

More than one-third (34.8%) of Americans fall into the subprime credit category, according to a 2019 Experian study.

Lenders consider subprime borrowers to present some level of risk compared to prime borrowers, including a higher likelihood of carrying high balances and missing payments. As a result, subprime borrowers often receive unfavorable terms on credit cards, loans and other financial products that can add up to high costs over time. These costs make it harder to get out of debt and improve credit scores.

In fact, subprime borrowers have an average of 7.5 delinquent accounts (more than double the national average of 3.6) and many subprime accounts have overdue balances.

Below, CNBC Select reviews what it means to be subprime, how subprime credit cards work and tips on improving your credit score.

What is a subprime credit score?

There is no one-size-fits-all answer to the credit scores that lenders consider subprime, but Experian provides a classification: FICO Scores that fall within the fair and average credit range — between 580 and 669 — are classified as subprime. However, each lender may use a different range.

You may have subprime credit for a number of reasons, including:

  • Missed or late payments
  • High credit card balances
  • Delinquent (overdue) accounts
  • Numerous credit inquiries
  • Short credit history

If you have subprime credit, you may face a harder time qualifying for credit, and the credit products you receive will often have higher interest rates and fees.

What are subprime credit cards?

Subprime credit cards often carry higher interest rates and numerous fees since lenders view you as a greater risk. This can add up to high costs compared to traditional cards that have minimal fees, or if they do charge fees, the card comes with luxury perks. In addition to more fees, you'll typically receive a smaller line of credit compared to someone with a prime credit score and the card likely doesn't come with a rewards program.

The Total Visa® Card is one example of a subprime credit card that comes with steep fees. Here are the main fees you'll be charged:

  1. One-time program/account opening fee: $89
  2. Annual fee: $75 first year, then $48
  3. Monthly service fee: $0 first year, then $6.25 per month

The first year you have the Total Visa Card, you'll wind up paying $164 in fees. That decreases to $123 in subsequent years, which is still a hefty amount to pay for a card with no rewards and an extremely high 34.99% APR.

However, there are select subprime cards that have no annual fee and can help you build credit through on-time payments. Common types of subprime cards include secured cards, such as the Capital One Platinum Secured Credit Card. This card can be used to make purchases like a regular credit card, but you're required to make a minimum security deposit of $49, $99 or $200, based on your creditworthiness, to receive a $200 credit limit.

If you don't want, or can't afford, to put aside money for a security deposit, you can consider alternative, traditional credit cards such as the Capital One Platinum Credit Card. This card also has no annual fee and doesn't require a security deposit.

Both of the Capital One cards have high 26.99% variable APRs, which is in line with other subprime cards listed in our best credit cards for fair and average credit. There are subprime cards with even higher interest rates, such as the Total Visa® Card, which has a 34.99% variable APR. That rate is almost double the national average credit card APR of 16.6% according to the Fed's most recent data from February 2020

For instance, let's say you have a $500 balance and only make the minimum payment of $25 per month. Here's the interest you'll incur with a subprime card with a 34.99% APR compared to a prime card with the average 16.61% APR.

  • Subprime interest charges: $261 
  • Prime interest charges: $89

Over the course of repayment, you'll pay nearly double in interest charges with a subprime credit card compared to a prime credit card. And this number will increase if you carry a larger balance on your card for a longer time period.

There are a few subprime cards that offer rewards programs and a reasonable annual fee. The Credit One Bank American Express® Card, for example, offers 1% cash back on all purchases and a $39 annual fee for the card. In order to offset the fee, you'll need to spend $3,900 a year. This card has no account opening or monthly service fees, but does have a relatively high 24.24% variable APR.

If you want to take advantage of the many perks offered by the best credit cards, it's necessary to improve your credit score so you can move up to a good credit score and prime credit products, which we explain below.

How to improve a subprime credit score

If you have a subprime credit score, take some time to identify the reason why, which may include missed payments or high balances. You can look for this information on your credit report, which you can check for free every week with each credit bureau (Experian, Equifax and TransUnion) through April 2021. In order to improve your credit score and achieve a good or excellent credit score, follow the credit repair tips below.

  • Make on-time payments: Payment history is the most important factor in your credit score, making it essential to always make at least your minimum payment on time. This keeps your account current and in good standing. Consider setting up autopay to ensure on-time payments.
  • Pay in full: Minimum payments will help you keep your account current, but you should pay your bill in full every month to reduce interest charges and the amount you owe on your credit cards, also known as your credit utilization rate.
  • Don't apply for too many accounts at once: Every time you submit an application for credit, and regardless if you're approved or denied, an inquiry appears on your credit report. This may lower your credit score by roughly five points, though it will rebound within a few months. As a result, try to limit applications as needed and consider using prequalification tools that don't hurt your credit score.
  • Get credit for paying monthly utility and cell phone bills on time: Experian Boost is a free feature that allows you to add payment history from your utility and cell phone payments to your Experian credit report. Simply connect your bank account(s) to Experian Boost so it can identify your utility and cell phone payment history and help you improve your credit score.

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Information about the Capital One Platinum Secured , Capital One Platinum Credit Card has been collected independently by Select and has not been reviewed or provided by the the issuers of the cards prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.