What is Tier 1 Credit?

If you have ever been to a dealership to purchase a car, you may have heard the salesperson use the term tier 1 credit, tier 2 credit, and tier 3 credit. We will explain the difference between the different credit tiers, as well as focus on what tier 1 credit is.

What is Tier 1 Credit?

Tier 1 Credit is a term that’s most often used in the world of car loans and usually refers to a credit score that is 750 or above. Different lenders define tier 1 credit differently, but most lenders define it as someone with a credit score of 750 or higher. People with tier 1 credit qualify for the best auto loan terms and interest rates. People with tier 1 credit receive the most favorable terms and interest rates because lenders view them as the least risky category of people to lend money to since they have a high credit score and have demonstrated responsible borrowing and repayment of debt in the past.

The term Tier 1 Credit is also used by other lenders, such as credit card issuers, mortgage lenders, and other credit products to refer to persons who have excellent credit. When a person is classified as having tier 1 credit, he has better approval odds and is likely to qualify for the best terms and interest rates because he or she represents the lowest risk to the lender.

The lower your credit score, the bigger the risk you represent to lenders and so you will fall in a different tier of credit and will therefore qualify for less favorable terms than someone with tier 1 credit. Also, some lenders may deny your application and if approved, you will be approved at a higher interest rate and will likely receive less favorable terms than someone with tier 1 credit. This applies to both car loans, as well as other credit items, such as credit cards and other loans.

Lower Tiers of Credit (Tier 1, Tier 2, Tier 3, Tier 4, and Tier 5)

Even if you do not have tier 1 credit, you will probably still qualify for an auto loan, however, you may not qualify for the best terms and interest rates. Also, some lenders may deny your credit application.

That said, even if you’re denied by some lenders, there are plenty of auto lenders who approve those with tier 2 and tier 3 credit. Tier 2 credit is usually defined as a credit score that ranges from 660 to 699 and tier 3 credit is usually defined as a credit score that ranges from 620 to 659. If you have a lower credit score you will fall within the 4th or 5th tier of credit.

As previously mentioned, the lower the credit tier you fall in, the less likely you are to be approved for a car loan, and if you’re approved, you will likely be approved at a high interest rate and/or unfavorable repayment terms.

The interest rate you’re approved for is extremely important because the higher your interest, the more money you will be paying to purchase your car. This could add up to thousands of dollars over the life of your loan. See the following example.

Two people go to the same dealership to purchase a Nissan Altima. The agreed-upon price for both persons is $20,000. A person with tier 1 credit is approved for a 60-month loan at a 3.95% interest rate, while a person with tier 3 credit is approved for a 60-month loan at a 12.95% interest rate.

The person with a low 3.95% interest rate will have a monthly payment of $368 and will have ended up paying $22,073 for the car at the end of the loan. However, the person who has a high-interest rate of 12.95% will have a monthly payment on $455 and will have ended up paying $27,273 for the same car. That is an additional $5,200 for the same car.

So, don’t take the interest rate you’re approved for granted because it could mean thousands of additional dollars over the life of your loan.

As such, you should do all that you can to improve your credit score because a good credit score will save you thousands of dollars when you finance a car.

What Credit Score Do You Need To Have Tier 1 Credit?

The vast majority of auto dealers and creditors define those with Tier 1 Credit as having a credit score of 750 or higher. That said, the definition of tier 1 credit is different from one lender to another. For example, some lenders define tier 1 credit as a credit score of 750 or higher, while others define it as a credit score of 700 or 740. So, while one lender may classify you as having tier 1 credit, you may be classified as having tier 2 credit with another lender.

In addition to the different definitions of tier 1 credit, different lenders and creditors use different credit scoring models, such as FICO and Vantage Score, which calculate credit scores differently. That said, both models will give you a credit score that ranges from a low of 300 to a high of 850. The higher your credit score, the better the tier of credit you will qualify for.

How to Get Tier 1 Credit

Regardless of how you define Tier 1 Credit, most lenders will only classify you as having Tier 1 Credit only if you have a credit score above 700. If your credit score is lower, here are some things that you can do to improve your credit score and get tier 1 credit:

  • Pay On Time – The biggest factor that affects your credit score is your payment history. Your payment history accounts for 35% of your credit score. So, make your credit card payment, auto loan payments, home mortgage payments, and student loan payments on time to improve your credit score.

  • Reduce Your Balances – The second most important factor affecting your credit score is your credit utilization. Credit utilization refers to the amount of available credit that you’re using. The lower your credit card balances, the lower your credit utilization. The lower your credit utilization, the better your credit score will be. So, if you have credit cards or other accounts that have high balances, payment them down to improve your credit score.

  • Don’t Apply For Too Much New Credit – If you want to improve your credit score, you should avoid applying for too many new credit cards and loans. This is so because every time you apply for credit, a hard inquiry is placed on your credit report, lowering your credit score. A single hard inquiry can only lower your credit score by 5 to 10 points. However, submitting too many new applications with a short period of time can significantly lower your credit score.

  • Periodically Check Your Credit Report – If you’re not already in the habit of checking your credit report, you should periodically check your credit report and if you find any inaccurate or negative information on your credit report you should address it to avoid a negative impact on your credit score. For example, if you find a collection account on your credit report that does not belong to you, you should dispute it to have it removed from your credit report. Once an inaccurate negative item is removed from your credit report, it will no longer drag your credit score down.

Credit Score Planet Frequently Asked Questions

1. What is a tier 1 credit score?

A tier 1 credit score is the best tier of credit classification you can fall under. If you have tier 1 credit, you will be approved by almost any lender and you will be approved for the best interest rates and repayment terms.

2. What is a tier 5 credit score?

Tier 5 credit is usually defined as a credit score that ranges from 630 to 649. Tier 5 credit means that many lenders will deny your credit application and lenders that do approve you will likely approve you only at higher interest rates and unfavorable repayment terms. That said, tier 5 is not the lowest category of credit scores, but it does signal that there are some issues with your credit.

3. What is tier 3 credit?

Tier 3 credit is usually defined as a credit score that ranges from 670 to 689. This is a good credit tier to be in with decent approval odds for loans and somewhat decent interest rates and repayment terms. However, if you have tier 3 credit, you will not qualify for the best interest rates and repayment terms.

4. Which is better tier 1 or tier 3 credit?

Tier 1 credit is much better than tier 3 credit because it means that you have a high credit score. Having a high credit score means that you’ve borrowed and repaid money responsibly, which makes you less risky for lenders. Those who have tier 1 credit will qualify for the best terms, whereas those who have tier 3 credit will qualify for okay terms but not as good as those who have tier 1 credit.