Before you go shopping for a loan, you should know where your credit score stands. The first step is to always check your Experian, Transunion, Equifax FICO scores so you know what you’re getting into.
When you know what credit tier you’re in, you’ll have a better idea of how to make it to Tier 1 credit if you’re not there already.
The credit tier system is basically how an auto lender knows what money factor to assign if you’re applying for an auto loan. It’s also used to determine your annual percentage rate (APR). The higher you climb in the credit tiers, the lower your interest rates will be.
What is Tier 1 Credit?
When talking about credit, Tier 1 is the place to be. It earns you the best rates, terms, and more options for your purchase. Why? Because when banks look at your credit history, there’s a lower risk of falling behind on payments or completely defaulting on your loan.
The specific score for Tier 1 credit depends on your lender. Most financing companies consider Tier 1 credit as a score of 750 and up. Some lenders consider credit scores of 700+ as part of Tier 1. So it’s super important to choose the right lender for your credit score.
What Are The Credit Tiers?
The credit tiers don’t stop at one. There’s the elusive Tier 1+, which is for the most highly qualified borrowers. Then there’s Tier 2 and Tier 3, which encompass lower credit scores. If you fall outside of Tier 3, you would be a subprime borrower.
If you’re familiar with business credit, you’re probably used to the credit tiers being backward. For businesses, Tier 3 and Tier 2 credit is the goal.
That’s not the case when you’re applying for a car loan, getting a home mortgage, or applying for a credit card. Personal credit prioritizes Tier 1 for higher credit scores and Tier 3 for lower credit. The tiers are used to quickly determine creditworthiness and what interest rate you’ll pay.
Above Tier 1
Remember when we said the tiers change depending on which lender you use? Well, in some cases you’ll encounter lenders who divvy up the credit scores even further with an extra tier above Tier 1. Usually, these are the folks with excellent credit in the 800+ credit score range.
The credit tier above Tier 1 is also known as Tier 0 or Tier 1+ credit. Some lenders use Tier 0, and some don’t. Being in Tier 0 means you have your pick of loan options and you’ll likely get the lowest interest rate available.
Alongside lower interest rates, you’ll also earn deals like no money down car financing or special dealership incentives.
You’ve seen the commercials offering great terms to “well-qualified buyers”. If you’re in Tier 0, that would be you.
Tier 1
Tier 1 credit is still a good goal to shoot for to get the car loan you want. Again, this is going to vary based on the bank, credit union, or dealership you apply at. The average credit score for Tier 1 is 700 and up. Market conditions affect this too.
Back in mid-pandemic 2020, we saw lots of auto dealerships have a difficult time moving their stock of vehicles. This led some auto financing companies to move the benchmark for Tier 1 credit a bit lower.
Some lenders included scores as low as 680 in their Tier 1 category to encourage sales. We might not see the same deals happen as the market bounces back though.
Lower Credit Tiers
If your credit score is below 700, you’ll probably fall into Tier 2 or 3 credit. According to Toyota Financials, their tier system puts Tier 2 borrowers firmly between a FICO score of 690 and 719.
Technically, that’s good credit. With a FICO credit score in that range, you’ve been responsible with credit in the past and have a good payment history. Meanwhile, other lenders consider a 640-690 as Tier 2. That’s a big difference.
You’ll still qualify for the car loan at a Tier 2 credit rating, but you’ll have a higher interest rate than a Tier 1 borrower. For Tier 3 credit, your FICO score is sitting in the 670-689 range at Toyota. Other lenders might range from 581 to 659.
When you get a car loan with a credit rating in the lower credit tiers, there are a few disadvantages:
- Higher monthly payment
- Higher interest rates
- Required cash down payment
To afford the monthly payment on a car loan with a low credit score, you might also need to extend the loan term past five years. That can lead to negative equity, making it more difficult to trade in or sell your car later. You don’t want that.
What Credit Score Do I Need To Get Into Tier 1?
To get into Tier 1, you’ll need a minimum credit score of 680 to 700. This helps you qualify for the best loan terms and interest rates. If your credit score isn’t quite there yet, we’ll be sharing some tips on how you can improve your credit history.
Already at Tier 1 status? Take it to the next level and find out how you can get an 800 credit score. With a little time and effort, you can get a hold of those awesome Tier 0 deals.
How To Get To Tier 1 Credit
Getting to Tier 1 credit is simple enough. Pay your bills on time, keep your debt low, and dispute inaccuracies. Obviously, that’s easier said than done sometimes. The biggest factors in getting there are payment history and time.
Since your credit score is affected by the age of your accounts, improving your credit doesn’t happen overnight. Come up with a plan to tackle each one so you can drive away in the car you want without high monthly payments or excessive interest rates.
Use Credit Strong
Credit cards are a great tool to help you build your credit history when you’re just getting started. They help demonstrate responsibility when used wisely. When it comes to boosting your credit in preparation for getting a car loan, a credit card might not be enough.
If you’ve been slowly building your credit with revolving accounts, it’s helpful to include installment loans on your credit history. It can improve your chances of making it into the next credit tier by diversifying your accounts.
So how do you get an installment loan? Simple. Use Credit Strong.
By opening a credit builder loan with Credit Strong, you can:
- Keep tabs on your credit with a free monthly FICO score
- Build credit history with a secured installment loan
- Build savings with an FDIC-insured savings account
Within nine months, you can raise your credit score by an average of 40 points. If you’re at a 660, that could take you to a 700 credit score in under a year with on-time payments.
Are you ready to build credit and save money? Open your credit-builder account today!
Pay Bills On Time
Your payment history is 35% of your overall credit score, making it the biggest contributing factor on the road to achieving excellent credit. Just one late payment can throw your credit score off track.
The best thing you can do to pay your bills on time is to develop a budget that works for you. Then you can start setting your bills on auto-pay to avoid any late payments. Auto paying your bills can also save you money on late fees.
If you’re behind and need to play catch up, it might be worth it to take on extra hours at work or pick up a side hustle. At least until you get caught up again. If you do have to make a late payment, try to pay before it’s 30 days late so it won’t hit your score as hard.
Dispute Any Inaccuracies on Your Credit Report
The people reporting information to the credit bureaus are human. Like all humans, they make mistakes sometimes. When those mistakes impact your credit report, then it’s time to take action.
Any false information on your credit report can be disputed. All the credit bureaus have ways for you to dispute inaccuracies online. If you prefer to do it by snail mail, the CFPB has instructions on how to file disputes with each credit bureau.
The most common inaccuracies include:
- Wrong name, or address
- Closed accounts still showing open
- Incorrectly reported late payments
- The same account listed twice
- Wrong balance information
It might take a while for the error to be removed from your credit report once you dispute it, but you’ll see the needle move on your credit score once it’s done.
Pay Down Debt
Paying down your debt is one of the most effective ways to move from bad credit to good credit. When you start paying down revolving credit accounts and installment loans, you lower your debt-to-income (DTI) ratio.
In fact, when we look at the credit score statistics for 2021, the people with higher credit scores are people with higher income. Since they’re able to pay down their debt more consistently, they lower their DTI.
Your DTI is calculated by dividing your total monthly debt payments by your monthly income. The ideal debt to income ratio to get down to is 1-10%. This shows credit bureaus a responsible level of credit use and even helps you qualify for a higher loan amount in some cases.
Don’t Apply for New Credit Accounts Unless Needed
When you’re getting ready to apply for the loan you really want, it’s best to hold off on applying for other credit. To the lenders, the extra credit inquiries for other accounts look like potential money problems on the horizon.
All in all, Tier 1 credit gets you the best of the best since you’re less of a risk to lenders. Being part of a lower credit tier doesn’t necessarily mean that you have bad credit though. It’s just how lenders assign APR on loans.
Moving from a lower credit tier to Tier 1 or above can save you major money in interest. Be sure to set up a plan to pay down debts, establish good payment history, and dispute errors on your credit.
CreditStrong helps improve your credit and can positively impact the factors that determine 90% of your FICO score.
