Let's define the following first
Sub Prime -Less than prime; credit with higher risk characteristics thus charged a greater rate of interest, such as bankruptcy or collection accounts or also called B&C credit.
Continuum - A sequence in which variation in vegetation and/or properties between one event and the next of the series is continuous rather than discontinuous.
Theory - a tentative insight into the natural world; a concept that is not yet verified but that if true would explain certain facts or phenomena; "a scientific hypothesis that survives experimental testing becomes a scientific theory."
The Sub Prime Continuum Theory states that people who have managed to find themselves with a B & C credit rating will always engage in fiscal irresponsibility not always to their fault but it is partly because of the credit risk assigned to them. In the current world we live in everyone's ability to re-pay a debt is based on the FICO (Fair Isaac Credit Organization) which causes a viscous circle once there is the first sign of trouble. It begins once you go from A+ prime credit to B/C sub prime credit; the reason for losing your prime status has no bearing no matter how valid of a reason it is. Once a person's status has changed from A+ prime to B/C sub prime life will change and the cycle begins.
One of the unspoken mentalities that the B/C sub prime candidates carry with them is the idea that there credit will never be the same again no matter what they do. This rationale is dangerous to both creditor & consumer; the best way a creditor can collect on a debt is to threaten to harm ones credit rating if that credit rating is already negative than the creditor has lost its most valuable tool in recouping the credit it extended. The consumer on the other hand views there new B/C sub prime status as a new reason not to have to be as attentive in regards to their bills due date. This newfound attitude is the start of the sub prime continuum theory.
The theory focuses on reasons that individuals representing the B/C sub prime credit tier maintain that status. Consumers classified as sub prime pay more for the same goods that prime credit consumers, this holds true to everything including mortgages, insurance, credit cards, lines of credit, financing household goods, business loans, vehicle loans, & even cell phones. The difference between a sub prime mortgage on one hundred thousand dollars and a prime mortgage can be as much as six percent or five hundred dollars a month higher. That may seem correct based on the creditor taking on more risk with a B/C sub prime borrower but many times it has the opposite effect. Does it really make sense to require the individual who has demonstrated a difficulty in paying his/her obligations to give them a five hundred dollar higher monthly payment then the prime consumer? I do not disagree that the creditor should hedge additional risk with greater reward, but I think there is a way to do this without damaging the consumer's ability to perform on the note on a monthly basis.
Obviously the creditor is helpless if the consumer decides to not pay the note, but there are ways of limiting theses occurrences. First of all is not to differentiate A+ prime credit from B/C sub credit from a monthly debt servicing perspective (interest rate) and implement a different method of collecting the reward for increasing the risk; one suggestion would be to take on a fee for consumers who are not credit worthy. This fee would not be pre-paid and not be calculated in the balance so that interest does not accrue on it. This said fee would be fully earned when the account is paid off or closed and by implementing monthly payments on the fee at zero percent once the balance is at zero and the consumer/creditor does not wish to extend out the credit again. The fee also can be modestly increased/decreased depending on current payment history; it is a risk/reward system. This fee would enable B/C sub prime credit consumers to realize the same debt service ratio's as the A+ prime consumer thus increasing the creditor's chance at recouping the credit extended and interest earned on that credit in a timely manner; while not losing out on taking on additional risk.
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