How You Accidentally Wind Up With Subprime Lenders On Your Credit Report

NEW YORK (MainStreet) — Offers from your local car dealership or furniture store to help consumers finance their purchase can sometimes come from a subprime lender despite your high credit score.

Some retailers use subprime lenders, which are companies that finance loans for consumers with lower credit scores. The higher your credit score, the less interest you pay to borrow money. Before you agree to the 0% financing for a year at the retailer, it "pays to examine the credit offer at your local furniture dealer or regional department store," said Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

Reading the fine print can pay off in cases like this. Your line of credit, which is offered through a credit card, could be backed by a subprime lender, even if you have a healthy credit history. While doing business with a known subprime lender may not have any impact on your score, it may end up being one more thing you have to explain when a company like a mortgage lender takes a look at your credit history, McClary said.

Offering no interest or other deals through retailers are ways for subprime finance companies to reach new customers.

“The lower-than-usual rates and ‘same as cash’ repayment terms are a gateway for them to market directly to customers with healthy credit,” McClary said. “Lending to those customers strengthens their portfolio and offsets the risk posed by their other customers who typically have lower credit scores and are more likely to default.”

Maintaining a high credit score is a boon to consumers so they can avoid paying high interest rates, which easily adds hundreds or thousands of dollars over the course of a loan. Credit scores play a large factor in the interest rate a borrower will receive, because lenders are determining the likelihood that someone will default on a loan or miss payments, said Jason van den Brand, CEO of Lenda, a San Francisco-based online home mortgage service.

“It's important to remember that the costs of a loan are closely associated to how ‘risky’ it is to give the loan,” he said. “If you look like a riskier borrower, your loan will cost more.”'

Healthy Credit Scores Equals Less Interest

A high credit score is the key to ensuring that borrowers receive a low interest rate. Here’s a quick rundown of what the numbers mean: a score of anything below 620 ranks as poor, 620-699 is fair, 700-749 is good and anything over 750 is excellent.

“Anything above 700 is considered to be good, but the average credit score for Americans is approximately 689,” said van den Brand. “A score of 620 to 640 will usually be good enough to qualify for any type of mortgage, but the interest rates you qualify for will probably be higher than someone who has a score of 740 or more.”

Figuring out if the store is issuing credit backed by a subprime lender can be easily accomplished by examining the rate the creditor is offering for people who borrow directly. If the interest rates seem higher than average, that can be a clue that they are not a prime lender, McClary said. "If they offer other products such as high interest car title loans or payday loans, that is a clear sign of a subprime lender." One example is Springleaf Finance which claims on its website to have “relationships with thousands of merchants across the country who offer all types of consumer products from home furnishings and appliances to musical equipment and electronics.”

High Interest Rates Outweigh Any Benefits

Even worse, some retail credit cards come with an interest rate that is the same for every customer, treating those with exceptional credit scores exactly the same as those who are below average, McClary said.

JC Penney, the national department store, uses Synchrony Bank as their lender. Their financing terms are sky high with an interest rate of 26.99% for all consumers.

“The thing about those interest rates is not the fact that they are so high, it’s that they are the same for everyone,” he said. “Those with excellent credit have no incentive to apply if they are going to be treated the same as someone at the other end of the spectrum.”

Not only should you be aware of the high interest rates that retail store cards often carry; but also, since they are issued by finance companies, they can have a negative effect on credit scores in some cases, said Kevin Gallegos, vice president of the Phoenix operations for Freedom Financial Network, a consumer debt resolution company.

“Most people are better off paying in cash or using a regular credit card when they shop,” he said. “If you do not repay the balance in full, the interest charges could equal or outweigh any savings at the cash register.”

--Written by Ellen Chang for MainStreet

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