First, find out your credit score and credit risk rating by obtaining a credit rating report from TransUnion (www.transunion.com), Experian (www.experian.com), or Equifax (www.equifax.com). Ascertain whether all the entries are correct and fair.

The most common causes of a low credit score (600 and below) or a high credit risk rating (R5 or higher) are:

a short credit history: 2 or 3 late payments do not look as bad in a 5-year record as in a 2-year record

total loan payments are more than 40% of your personal disposable income

a record of bankruptcy (records are kept for 10 years)

frequent late payments: an indication of inadequate cash inflows

frequent availment of loans: another indication of inadequate cash inflows.

In the next posts: what can / should you do to avoid or erase these black marks on your credit rating and climb out of subprime.

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In addition to the credit score (or FICO score) where a score below 600 will drop you into the subprime category, financial institutions also do a credit risk rating where a borrower is evaluated according to a scale of 1 to 9, the lower scale being the better risk and deserving of lower interest.

To the number is attached a letter modifier: R (revolving as in credit cards) or I (installment as in a house or car loan).

Numbers 1 through 6 indicate the number of months you are habitually in arrears or late in payments, the number 1 declaring that you usually pay within a month. A credit risk rating of 7 tells the loan officer that you have consolidated your debts (i.e., some refinancing). A rating of 8 means the loan has been repaid through repossession. The dreaded 9 rating means you have been in default.

A credit risk rating of 5 and higher will drop you into subprime and a high interest rate. Interest rates assigned to the higher scales are discretionary (perhaps, how badly or well the day is going for the loan officer on your case).

A credit risk rating of “0″ (zero) is also given which means that the financial institution has not been able to obtain a history of debt service of enough length to make a judgment on how behaved a borrower you have been. However, the financial institution does not give you the benefit of the doubt and considers you unreliable (guilty until proven innocent) and will place you in the subprime category.

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Credit Scores generated by the financial institution’s credit rating system range from 300 to 850, where the higher score denotes a better risk. A score below 600 is subprime. Although credit bureaus estimate that more than half of US residents have credit scores higher than 700 and will qualify for normal market rates on their loans, it is nevertheless important to find out how you can fall into the subprime category and be saddled with higher interests and more stringent loan provisions.

A score below 600 can be earned:

if you have less than 2 years of credit history

if your total loan payments from all your loans outstanding are more than 40% of your discretionary income (e.g., the more credit cards you have, the lower the credit score)

if you have filed for bankruptcy in the past (credit bureaus keep bankruptcy records for 10 years)

if you have had frequent late payments on your loans

if you have availed of loans more than three times in a year for more than two years in a row.

These are thumb rules and will vary from financial institution to financial institution, depending on each institution’s credit policies, aggressiveness, or willingness to take credit risks.

A borrower who is unable or unwilling to provide sufficient information (or the complete data that the financial institution requires) will also be given a subprime loan, i.e., a NINA (no income / no assets) or SISA (stated income / stated assets) loan. Basically, the borrower’s income and assets will not be actually verified by the bank (although employment will be verified). Sometimes, a borrower will deliberately go for a NINA / SISA loan to obtain a mortgage which would be beyond their rated / computed capacity to pay.

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