In marketing it often seems like there’s a rule of three. Just as the Olympics have winners of Gold, Silver and Bronze medals, products are often marketed as “Good, Better, Best.”
So it goes with credit scores as well. Consumers are often ranked as Tier 1, Tier 2, and Tier 3 credit risks, based on these scores. Alternately, some lenders use an A, B, and C grouping, or even Platinum, Gold and Silver.
But these Tier 1/2/3 scoring systems aren’t just fancy marketing schemes. The higher your ‘tier’, the lower the potential monthly payment on your new car. That’s because the higher your FICO score, the better your chance of getting access to the best loan rates.
What is Tier 1 Credit?
Tier 1, Tier 2 and Tier 3 credit are essentially shorthand for the group in which your credit score ranks you. Tier 1/2/3 credit is based on your credit report, which the credit reporting agencies evaluate using the FICO numerical credit scoring system.
Whether you qualify for Tier 1 Credit depends on your credit report. Credit reports are divided into identifying personal information, credit history, public records and requests for your credit information. Your history with revolving credit (like a department store card where charges vary every month) and installment credit (a fixed monthly payment, like a car loan) will be detailed. In addition to late or missed payments and the dreaded ‘charge-off’ (when a creditor gives up and writes off a debt after repeated efforts to collect) the credit report will show how often you’ve moved addresses or jobs and whether you’ve been sued, arrested, have judgments against you or have filed for bankruptcy.
A credit score is a numerical representation of this credit record, based on the mathematical model originally developed by Fair Isaac Corp, (why it’s called a ‘FICO’ score). Financial companies put ranges of these credit scores into credit tiers, such as Tier 1 credit, Tier 2 credit, etc. Auto lenders will look at your FICO score and whether you’re Tier 1/2/3, to determine if they want to loan you money, what rates and terns you qualify for, and how much they will let you borrow.
The Tier 1/2/3 credit system is designed to help a credit manager tell at a glance what kind of business opportunity—or credit risk—you are. If a finance company considers a loan risky, they either won’t make it or demand compensation for taking on the risk by charging higher loan rates and/or fees.
So what are the numbers for Tier 1 credit—and for that matter, for Tier 2 Credit and Tier 3 Credit? FICO scores can theoretically range between 300 and 900, although it’s rare to see the extremes. Most scores fall somewhere between 600 and 800.
In general, a score of 700 to 740 and above will be considered excellent or Tier 1 Credit. A score of 660 to 699 would be considered average, or Tier 2 Credit. A score of 620 to 659 would be considered fair, or Tier 3.
Like women’s dress sizes, which vary from manufacturer to manufacturer and from store to store, the exact definitions of these tiers vary. Some carmakers have expanded the system, adding a ‘Tier 0’ for scores of 740 and above and Tier 4 for scores of 600 to 619.
So What Does Tier 1/2/3 Credit Mean For Me?
The higher your score, the higher your tier, the better your credit. If you have a FICO score of over 700, congratulations; you’re generally considered a ‘well-qualified buyer.’ That Tier 1 designation (or Tier 0 if your credit is really shiny) should qualify you for the best loan rates, often lower than the prime rate. Just be aware that in tough economic times, even well-qualified buyers can have difficulties getting financing and require lots of documentation.
A score of 660-700, putting you in Tier 2, can mean a bank or dealership could get you a loan around the prime rate. A score of 620-659, putting you in Tier 3, might mean that the dealership will offer you a loan at higher subprime rates. Scores below Tier 3, such as 619 or below, are often considered poor credit. Dealers may be able to get you a loan, but often it will mean paying higher rates and being assessed additional fees.
To make the situation even more confusing, in addition to Tier 1/2/3 Credit based on these regular FICO scores, there’s also a specialized auto credit score, the "FICO Auto Industry Option". This score is not available to consumers, but only to dealers and finance companies. But this ‘Auto Industry Option’ is calculated primarily on your previous auto loan history and not your overall credit. So even if you’ve missed a payment on your credit card or have other issues, if you’ve stayed fairly current on your auto loan you may very well get another one.
Tier 1/2/3 Credit: Can I Change the Numbers?
Before you start car shopping, get your credit reports from each of the big three reporting agencies, (TransUnion, Experian and Equifax) from www.annualcreditreport.com. When you get the reports, look each over carefully. Send each agency a certified letter with any item you’d like to dispute or correct and ask them to remove it from your file. (The law states that all errors should be removed within 30 days.) Getting a late payment or two taken off might seem like a small change, but it might be enough to bump you from Tier 3 to Tier 2—and save you hundreds in interest.
Finally, recognize that your score, whether you are Tier 1, 2, or 3, and your ability to get a loan are not written in stone. Like any number, they’re open to interpretation by the dealer and the auto finance company—the same people who want to put you into a new car.