When you use credit, you start building a credit profile and a sense of creditworthiness. But what you may not know is that your credit, spending, and debt habits follow you in the form of a risk profile.
This risk profile lets future lenders know whether or not to approve you for more credit or loans. Additionally, your credit score category informs these decisions. Read on to learn more about:
- The 6 borrower risk profiles
- Credit score categories
- Where you fall in this hierarchy
What Is a Risk Profile?
This “risk profile” is essentially like a report card for how well you’ve managed your debt, finances, and credit lines over time. Most people fall into one of the six different risk profiles, depending on what type of debt they have accrued (if any at all).
Since there are various types of credit you can use in the US, there are various types of profiles you may match—read more from Forbes.
When you go to a lender in the future—whether it’s applying for a loan, new credit card, payment plan for a couch, or some other line of credit—they will examine your “risk profile” along with your credit history.
Note: risk profiles aren’t the same as your credit score, but they do influence your credit score.
For example, if you have a risk profile of auto and mortgage debt, then you have multiple forms of debt. This scenario would likely mean you have a lower credit score and fall into one of the subprime credit score ranges.
Below, we’ll take a look at the six different risk profiles of borrowers. But, first, let’s take a look at these different credit score ranges.
What Are Credit Score Ranges?
You may have heard that lenders look at your creditworthiness to determine whether they will approve you for credit.
Well, creditworthiness is essentially how well your record shows that you can pay off debt, or better yet, avoid accruing it in the first place. Each person with credit will fall into one of the following credit score ranges over time.
Deep Subprime | Below 580
This is the lowest credit score range a borrower can fall into. When you apply for new credit or loans, you are not likely to get approved with scores in this range (below 580).
This is where most people start when they have just opened their first line of credit. At this stage, the only credit you can get approved for is secure forms, like secured credit cards and loans.
Subprime | 580 – 619
Subprime, as the name suggests, means your credit score is below the prime. Scores between 580 and 619 characterize this score range.
Near-Prime | 620 – 659
Near-prime scores are one step closer to a prime credit score, but they still fall short. These scores range between 620 and 659. You can still get approved for some credit in these cases, but not as often. Near-prime is fair or average credit.
Prime | 660 – 719
Prime credit scores fall between 660 and 719. This is a good credit range to be in, and you can actually still achieve a lot without needing a super-prime score.
You can get approved for most cards and loans with decent rewards and benefits if you have a prime credit score. Having a higher score like this also enables you to move from secured to unsecured cards and loans.
Super-Prime | 720 or Greater
A super-prime credit score is the best you can have. With a credit score of 720 or higher, these types of people can achieve luxury perks, low interest rates, and more with their excellent credit.
The Six Risk Profiles
Each borrower (a person who uses credit) has a different risk profile. Your risk profile identifies the types of debt you currently have or have had.
Some people have a risk profile of no debt, while others accrue debt in various categories, such as credit cards and loans combined.
Mortgages – otherwise known as home loans – are a unique line of credit that is specifically for paying off a house over years. If your borrower risk profile is mortgage-only, this means that you currently only have debt in the area of a home loan.
While this is a single category of debt, note that it often takes various forms of previous credit to qualify for home loans. This means that most mortgage-only consumers have accrued other types of debt in the past and so their credit score probably reflects that.
Credit Card-Only Consumer
This risk profile is pretty straightforward. You have this risk profile to show for yourself if you only currently have debt in the area of credit cards. Some people only hold one line of credit as a credit card, while others keep many credit cards to expand and improve their credit score over time.
While this limits debts to one area of credit, there is still a possibility that these types of borrowers have a lot of debt unpaid and therefore, a subprime or deep subprime credit score to show for themselves.
But it all depends on how quickly you make payments and whether or not you carry a balance on your card(s). If you carry a balance at any given time, credit bureaus will view that as “debt”, but most individuals don’t consider themselves in debt between payments if they always pay in full.
Auto Loan-Only Consumer
Auto loans are another form of credit that contributes to a consumer’s risk profile. If you have a car you are paying off, or multiple cars you are paying off, then you are essentially in debt to whichever credit lender has approved you.
It’s far less common to only have this type of debt to show for yourself, since most people have to have established some form of credit, like with a credit card or two, before getting approved for an auto loan.
Student Loan-Only Consumer
While student loan debt is one of the most common types of debt among borrowers, it is not very common for borrowers to have this risk profile.
Here’s why: lenders give out student loans and approve them far more easily than other forms of credit since they give them to students, who are typically young people with no other way of establishing credit.
Student loan payments often carry on for years or even decades after a student graduates, which means it’s very likely that the borrower will have accrued other forms of debt since then.
It would be much more likely for a borrower to have a risk profile that includes other forms of debt in addition to student loan debt.
Auto Loan + Mortgage Consumer
Auto loan + mortgage is one of the most common categories of loans among consumers. The reason is pretty straightforward; shelter and transportation are extremely important in America, where most people have a house and at least one automobile.
This risk profile may aid your credit score, as it helps you have multiple files to report to credit bureaus and potentially boost your score. On the other hand, though, this scenario may lower your credit score if you can’t get your debt under control and make payments on time and in full.
No Debt Consumer
Does it surprise you to hear that the “no debt” consumer is the most common type of risk profile there is? While many people are in debt in some way, people with no debt encompass people who also don’t have any lines of credit.
It’s extremely important in the United States to establish and build lines of credit to form a credit score and increase it. While it may seem like this is a risk profile that puts one at an advantage for credit score, this is not the case in all scenarios.
Some people have “no debt” because they have closed all lines of existing credit and paid them off. While this may seem enticing, keeping old credit lines open even after you pay the debt allows individuals to continue to maintain and grow their credit score. So the “no debt” profile doesn’t always equate to a prime or above prime credit score.
An individual’s credit risk profile influences the type of credit score category they fall into over time.
The way that risk profiles affect credit score categories will vary and don’t always correspond exactly. Sometimes, having more lines of credit (forms of debt) can actually help one’s credit score to increase if managed well and on time.
On the other hand, having only one form of debt may help a person’s credit score by minimizing debts before they get out of hand.
To read more on topics like this, check out the Finance category