NEW YORK, April 17, 2023 (Newswire.com) - Credello: If you're a subprime credit holder, you could be in for a tough time. Rising interest rates from the Federal Reserve are hitting your score hard, making it harder to get approved for new loans and leading to higher payments. What should you do?
How subprime credit works
What is subprime credit? Subprime credit refers to loans or credit cards given to people with lower credit scores than average. Because these loans are riskier, lenders charge higher interest rates to account for the risk. This makes it harder for subprime borrowers to pay off their debt, and they often default.
Why are interest rates going up?
The Federal Reserve, also referred to as "The Fed," is the central bank in charge of things that affect the US economy, including maintaining the value of the US dollar and curbing inflation. The Fed will adjust interest rates for borrowing money to combat rising inflation. If inflation is low, interest rates will be low to encourage spending to keep the dollar's value high.
If inflation rises, the Fed will raise interest rates to slow down spending so supply levels adjust accordingly.
Because of the economic damage caused by COVID-19, inflation began to rise sharply worldwide. To help the U.S. economy recover, the Fed started raising interest rates. The rising interest rate is a double-edged sword:
If you save money in savings accounts, CDs, etc., then you'll see more money thanks to the increase in interest
If you borrow money via market loans, credit cards, or other methods with variable interest rates, you'll see an increase in your balances because of a higher interest rate charged to your purchases. Adding on the extra costs for goods caused by inflation, and suddenly you're seeing your hard-earned paycheck not covering as much as it used to.
What you can do
There is no guarantee that rising interest rates will cause your credit score to fall, but they could lead to higher payments and decreased access to credit. If this happens, make sure you take action to improve your score.
First, begin working toward turning your subprime score into a prime one. What is a prime credit score? It's a score that's on the other side of the spectrum and is around 660 - 719. People with prime scores tend to have low balances on their credit cards, long histories of on-time payments, and handle their money responsibly. Consequently, they'll see fewer increases in their interest rates and tend to receive more competitive offers for loans and credit cards than those with subprime do.
Unfortunately, credit scores don't fluctuate quickly, but there are a few categories where you should focus your effort to have the most impact:
On-time payments - This is the most significant factor and typically accounts for 35% of your score. Lenders will typically report a late payment if it's over 30 days past due, but this isn't a hard and fast rule. Do your best to make at least the minimum monthly payment on time. The longer your history shows you get what's owed back to a lender on time, the faster your credit score will rise.
The amount of credit you use - If you've had a history of seeing your credit cards as "free money," then you most likely carry balances on your cards. Some were taught this was the way to achieve good credit, but this isn't the case. While it is true that lenders want you to use your cards to make purchases, you're not required to pay interest to raise your score. The highest credit scores utilize no more than 10% of their available credit.
Other factors that aren't as important are the mix of credit you have, the length of your credit history, and the number of inquiries made on your credit report. While these carry some weight, they're easily canceled out by showing a good history of paying your bills on time and keeping your balances low.
The bottom line
If you're currently dealing with higher interest rates on your credit card or loans, take action to improve your score. You can do several things to raise your chances of getting a better rate, such as improving your credit score and reducing the amount of credit you use.
Credello is a financial tech company offering a personal finance tool that simplifies financial decisions through personalized, on-demand recommendations — so users can borrow, save, or invest with confidence. Credello believes that finding the right financial product should be as easy and interactive as online shopping, and we are on a mission to make that possible. For more information, please visit https://www.credello.com.Contact Information:
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Original Source: Credello: Subprime Credit Holders Are Getting Hit by Rising Interest Rates the Hardest