Tier 1 credit is a term usually applied to auto loan seekers, and it refers to individuals with the best credit scores. If you’re not considered a tier-one credit applicant, it doesn’t mean you can’t get a car loan. That being said, tier-one credit borrowers will generally be eligible for better interest rates and loan terms.
If you’ve ever tried to get a loan or apply for a credit card and been denied, you’re probably aware of how important your credit history is when applying for any type of credit. An auto loan lender or bank wants to feel pretty confident that you’ll pay the money back, and that determination is largely based on the health of your credit report.
Today we’ll talk about what the different tiers of credit mean and how they impact your ability to get a loan with more favorable terms. We’ll also take a look at how to reach and maintain tier 1 (or tier one) credit status.
What is tier 1 credit?
Tier one credit describes the highest credit ranking and is typically used by car dealers or banks that offer auto loans. Lenders use the tier system to more easily decide what interest rates and terms they offer to borrowers, depending on how they rank.
It can be tricky to pin down exactly what each lender considers tier 1 credit. But in general, you’ll need to have a minimum credit score of 720, although that can vary a lot by different lenders. Some banks may require at least a 750 score whereas other lenders might deem those with 720 or higher credit scores eligible for tier-one status.
Someone who is considered at tier 1 credit status must have an excellent credit score — as reported by the three major credit bureaus — but that’s not all that lenders will look at. Other factors include an applicant’s income, assets, and other debts.
For example, you might have a great credit score, but also carry some hefty credit card balances or have used up a lot of your available credit. In those scenarios, even if your credit scores are technically high enough for tier 1 credit status, you might not qualify because you exhibit some risky credit behavior as far as banks are concerned.
What is tier 2 credit?
Someone classified as tier two has a relatively strong credit score, typically from about 660 up to the 700-plus threshold that marks tier one. Tier two still implies you have a good credit score, but you aren’t quite at that tier one ranking yet.
It could be your credit is “thin,” meaning you don’t have a lot of history and need more credit on your report to prove your creditworthiness. It could also mean that you’ve had some bad credit reporting such as late payments in the past.
Whatever the reasons, you’ll probably still be able to get loans approved or accept offers from credit card companies; you just may not get the better interest rates and loan terms as tier 1 credit applicants.
What is tier 3 credit?
Tier 3 credit is the lowest credit ranking you can have, and still hope to gain financing from a traditional lender. Typically this means your score is 660 or less, but again, different lenders will have different criteria.
For example, if your credit is only 640, but you make a decent income and have no history of paying bills late, you can probably still secure financing. You just shouldn’t expect the most ideal terms or rates. But you can work on your credit score in the meantime and eventually apply for refinancing down the road. If you want some extra help to better your credit score, consider reaching out to one of the credit repair companies below.
Benefits of a tier 1 credit rating
The biggest advantage to having a tier one credit score is the ability to save money in both the short-term and also over the life of the loan. There are several ways in which borrowers can realize these savings.
Lower down payment
If you have achieved a tier-one credit ranking, you are considered a very good credit risk. This means lenders for auto loans won’t require as much of a down payment as someone with less than stellar or bad credit.
This saves you money in the short-term because you have the option to hold onto more cash to use for investing, your emergency fund, or putting it towards other savings goals.
Better interest rate
Tier one borrowers that demonstrate excellent credit are able to purchase a car with a significantly better interest rate than those with lower credit scores. This saves you a lot over the life of the loan in the form of smaller interest payments.
You can also typically get better rates with credit card companies, mortgage loans, and other types of lenders. Achieving tier 1 credit status can be a big help in many aspects of your financial life.
Longer repayment terms
Another benefit of having a tier-one credit ranking is the option to have a longer time to repay your auto loan. This can save you some cash by lowering your monthly payments.
You will pay more in interest because of the longer loan term, but it’s a nice choice to have available if you want to save money right now. And of course, you can always pay more each month to lower the total interest paid or refinance your car loan later, such as with one of the lenders below.
More financing options
As a tier 1 credit customer, you can get a loan pretty much anywhere, which makes it a lot easier to shop multiple offers for the best deal. Some lenders may not even give loans to those with poor credit scores, so more financing options give you a lot more flexibility in finding the best rates and terms out there.
How to achieve tier 1 credit scores
If you have a low credit score, the prospect of raising your score can seem daunting. But there are simple things you can do to increase your score and, as a result, qualify for more and better lending options in the future.
- Pay your bills on time. The most important factor in your credit score is your history of making on-time payments. If you absolutely can’t swing a payment, be sure to at least pay within less than 30 days of your due date to avoid negative credit reporting.
- Pay down your debt. A lender typically doesn’t want to see borrowers who are maxed out on their credit card balances. To boost your score, you should try and make a dent in those debts as much as possible. This is particularly true if think you’ll need financing to purchase a car in the near future. In general, most creditors prefer to see a credit utilization ratio of 30% or less, so make that a priority.
- Don’t close old accounts. The length of your credit is another important factor when assessing your credit score. Creditors and banks want to see that their customers have a demonstrated ability to manage debt over several years. When you close old accounts, it lowers the average age of your credit record.
Why is my credit score different at each of the three major credit bureaus?
It’s important to know that credit bureaus don’t always use the same credit scoring models for all of your credit reports. That means your actual score will vary from one credit bureau to another. Credit scoring models describe the way each element of your credit report is weighted.
For example, almost all credit bureaus weigh on-time or late payments the heaviest. However, other aspects — such as credit utilization ratio or multiple credit inquiries — may be more or less important to your overall credit score. When you hear the term “FICO score,” that’s just one of the different credit scoring models, but they essentially all measure the same thing.
- A person with tier one credit typically has an excellent credit history and a credit score of at least 720 — possibly a bit higher for some lenders.
- In addition to credit scores, lenders will also assess customers’ incomes and additional debts.
- Tier-one credit applicants have the opportunity to qualify for better interest rates and more favorable loan terms than borrowers with tier-two or tier-three credit ratings.
- Ways to achieve a tier-one credit ranking include having a record of no late payments, low credit utilization, and a long history of responsible credit usage.
View Article Sources
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- How to Improve Your Credit Score — SuperMoney
- Chrysler Capital Auto Loans — SuperMoney
- Toyota Financial Services Auto Loan — SuperMoney
- Ford Credit — SuperMoney
- GM Financial — SuperMoney
- Subaru Motors Finance — SuperMoney
- Volkswagen Credit Auto Loan — SuperMoney
- USAA Auto Loan — SuperMoney
- Infiniti Financing Auto Loan — SuperMoney