When applying for a loan or new credit account, you may have encountered the term “tier 1 credit.” As if the struggle to achieve a financial milestone wasn't enough, turns out you're dependent on a classification you know little about to determine creditworthiness.
Credit tiers establish how good or bad your credit score is, ranging from one to five. The closer you are to the top, the better your financial opportunities are going to be. If you're at the bottom tiers, you might encounter some closed doors.
But what, exactly, is tier one credit? How to get into this category? Below, we’ll explain everything you need to know about credit score categorization. Hopefully, you'll get to the end with more financial literacy and solid ideas for what to do to develop good credit.
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Credit score overview
A credit score is a three digit number between 300-850, based on your credit report, that predicts the probability of you repaying your loan. Individuals with low credit scores are considered “high-risk borrowers,” meaning they're less likely to pay their debts. Likewise, individuals with high credit scores are considered “low risk borrowers,” meaning they're likely to pay their debts.
Being a low-risk borrower comes with benefits, such as a higher chance of being approved for loans and other financial opportunities. On the other hand, if you're a high-risk borrower, you might face some drawbacks. For instance, if you can't get a credit card, your credit score can be the reason.
What is a “tier 1” credit score?
A tier 1 credit score is the highest level of creditworthiness—it signifies that you have excellent credit and are a low risk borrower. According to the FICO® scale, a tier one credit score ranges from 800 to 850 scoring points. Criteria may vary between lenders, but the FICO® scale is the most commonly used in the U.S.
What is a tier 2 credit score?
Below the tier 1 are tier 2, 3, 4, and 5. A tier 2 credit score ranges from 740 to 799 and means you have very good credit.
Tier 3 credit score ranges from 670 to 739 and puts you in the “good” credit category.
Finally, we have tiers 4 and 5. A tier 4 credit score ranges from 580 to 669 and means you have “fair” credit, while tier 5 ranges from 300 to 579 and puts you in the “poor” credit category. If you’re in a lower tier, don’t panic. As we said earlier, this categorization is a general rule of thumb for lenders based on the FICO® scoring model, but can vary depending on the lender.
How does credit score work?
Your credit score is basically determined by your financial habits—the better your money management is, the higher are your chances of having a tier 1 credit score. These are the key factors that credit bureaus take into account:
- Credit utilization rate: Your credit utilization rate is determined by the percentage of your available credit you're currently using. Ideally, it should be below 30%, otherwise it signals that you're dependent on credit (in the form of credit cards and other types of debt).
- Payment history: Your ability to pay your bills on time is a big factor on your credit score. Any late payments (utilities bill, mortgage, credit card), even if it happened once, might hurt your score.
- Credit inquiries: If you're constantly applying for credit cards or loans, the inquiries pile up in your credit report, signaling that you're dependent on credit. Therefore, you're seen as a risk borrower, which may lower your credit score.
- Credit history: A short credit history, with too many new and briefly used accounts, is not ideal. Lenders prefer borrowers with a lengthy credit history, showing stability and good money management.
Why does a tier 1 credit matter?
Having tier 1 credit score grants you many financial benefits. For starters, you're more likely to be approved for a mortgage, auto loans, personal loans, credit cards, or approved to rent an apartment, for example. The list of benefits also includes:
- Lower interest rates: Besides being more easily approved for loans and credit cards, a tier one credit also guarantees lower interest rates than what's usually offered to individuals at lower tiers.
- Negotiation power: If you're not offered the best terms and interest rates available to borrowers right away, an excellent credit score puts you in a good position to negotiate. As a low-risk borrower, lenders want to do business with you and are willing to make some accommodations.
- Multiple financing options: Since lenders like to do business with tier 1 credit individuals, having excellent credit gives you options—meaning you can research the market and pick the institutions that offer the best terms.
Though your credit score is a crucial factor to determine whether or not you'll get those financial opportunities, it's important to note that there are other factors that come into play. For instance, your income, assets, and debt.
How to get a tier 1 credit score?
To move your credit score up and reach tier one, you must develop financial discipline and organization. Here’s what you can do:
- Always pay your bills on time: Even if you have to make minimum payments, it's still better than a late payment. Setting automatic payments in your bank account can help you stay on track.
- Keep your credit utilization rate low. Your credit utilization rate ideally should be less than 30%. For instance, if you have a $10,000 credit card limit, your total balance shouldn't be over $3,000.
- Only apply for credit if necessary. Experts recommend that you wait at least six months from your last credit application to apply for more credit. Avoid making too many inquiries consecutively, as it may lower your credit score.
- Keep a lengthy credit history. Don't close old accounts, even if you're not currently using them. Instead, keep them active (while watching out for any fees) to create a lengthy credit history, which is seen as positive by credit bureaus and lenders.
FAQs
What is a tier 1 business credit?
Tier 1 business credit refers to a basic vendor trade credit, which provides small business owners with the chance to establish their businesses by buying supplies, furniture, or inventory, for example. It's different from tier 1 credit for individuals seeking personal loans or credit cards. In those cases, the tier an individual happens to fall into determines their creditworthiness and whether or not they'll get financial opportunities.
What is tier 1 credit for auto loan?
With a tier 1 credit score you might get a larger loan amount, lower interest rates, lower monthly payments amounts, and even extended debt repayment periods. Basically, you'll get the best terms and conditions than what's normally offered for individuals with lower credit scores.
What is a tier credit for mortgage?
Similarly to a tier one for auto loans, tire one credit for mortgage loans means you might get excellent terms and conditions. This includes larger loan amounts, lower down payment and fewer fees, as well as having a higher chance of being pre-approved quickly.