Bankrate Study Details $3,400 Annual Cost for Subprime Borrowers in U.S.
A recent Bankrate study reveals that U.S. consumers with subprime credit scores (around 620) face significantly higher costs for essential financial products compared to prime borrowers (700+ scores). This "subprime tax" averages $3,400 annually, equating to approximately 4% of the typical household income of $77,719.
The increased costs arise from higher interest rates and insurance premiums on products like mortgages, auto loans, credit cards, home and auto insurance. Notably, mortgage interest accounts for the largest portion of this cost differential. Subprime borrowers pay approximately $1,330 more per year on mortgage interest for a 30-year fixed loan on a $400,000 home with 20% down payment, amounting to an excess of nearly $40,000 over 30 years compared to prime borrowers. Credit card interest rates and personal loan APRs also contribute to the subprime tax, with annual additional interest costs of $89 and $328 respectively for typical balances and loan amounts. The study uses national averages for loan amounts, insurance coverages, and rates obtained from sources such as Experian, FICO, TransUnion, and the Consumer Financial Protection Bureau. The heightened costs reflect lenders' and insurers' increased risk assessments and additional underwriting efforts required for subprime customers, who may also encounter more frequent credit denials. The current high-interest rate environment exacerbates these disparities, potentially expanding the gap over time if rates remain elevated. Subprime borrowers often face challenges including less emergency savings and are more prone to cycles of debt due to these cost burdens. Additionally, credit scoring models can disproportionately affect minority and lower-income consumers, impacting their access to affordable credit and insurance products.
Some lenders and insurers, such as Upstart and Cure Auto Insurance, are attempting to mitigate reliance on traditional credit scores by incorporating alternative data and focusing less on credit history, although subprime borrowers may still experience higher costs.
Consumer credit bureaus emphasize education efforts and partnerships with community organizations to address financial inclusion. Experts recommend maintaining on-time payments, reducing credit utilization, and regularly reviewing credit reports to improve credit scores and reduce the subprime tax over time. The findings highlight the ongoing financial challenges faced by subprime borrowers in the U.S. market, underscoring the influence of credit scores on borrowing and insurance costs in the current economic landscape.