Learn why understanding “credit tiers” can help you fly at a higher level as you increase your credit score, build wealth and achieve more…
When it comes to credit scoring there are tiers or ranges that are better for you when it comes to getting loans at a good or the best rates when dealing with creditors.
Your repayment habits that you have throughout your lifetime helps build your credit file and hence your credit score.
The more responsible you are—the higher your credit score and the greater the probability it is that you will get a loan at a good or the best rate.
By doing so you will be able to obtain credit in a way that is best for you and your family throughout the period in your life that you desire–or have a need to use credit.
Credit scores fall into 3 different ranges or tiers that lenders use to grant credit and the higher you fall in a credit range or tier, the better your credit terms in most cases.
What is a Tiered credit score?
A tiered credit score falls into “3 ranges” and they are used by creditors when it comes to credit decisions from credit cards, auto loans, home loans, student loans and many other credit and consumer loans that are of a certain type, along with insurance and employment purposes.
Tier 1 credit cards are for people with “excellent” credit (750 and above).
Tier 2 credit cards require “good” credit and falls in the 700 to 749 range on the standard 300-850 point scale.
And Tier 3 credit cards are for “fair” credit and falls in the 640 to 699 range on the standard 300-850 point scale.
In addition to getting the best interest rate on credit cards, the higher your credit tier, the better the chance that you will get the best rate on home loans, student loans, auto loans and many other credit and consumer loans that are of a certain type, along with insurance and other purposes that you may have where your credit profile would be used.
How lenders rate credit…
Lenders must evaluate the risks of lending money to you and generally follow the same guidelines to evaluate a borrower’s creditworthiness.
In addition to the “5 credit factors” that will be presented later in this discussion, a creditor usually looks at three factors known as the “three Cs” and also known as Capacity, Capital, and Character when evaluating you as a credit risk.
- Capacity is your present and future ability to meet your financial obligations. Some of the areas examined would be your work history and the amount of debt that you already owe and that would be used to determine your ability to repay.
- Capital is savings and other assets that could be used by you as collateral for loans. Even if you are not required to post collateral, many creditors express a preference that you have assets other than income that could be used to repay your loan.
- Character is your trustworthiness and promptness in paying your existing bills and other debt. Your credit history in a real sense defines your character whether you believe it is fair or not, as many lenders look at your past payment habits to determine the likelihood of future repayment.
The 3 C’s show in a real way whether you have the capacity, capital and character that is required of you when lenders are determining your ability to repay loans of various types.
In the past the “three Cs” was all that was needed to get a favorable decision on a loan, but in today’s information age, much more is required, such as a credit report(s) and credit score(s), and the higher you fall in the credit tier range with your credit score–the better your chances are to obtain a loan at a good or the best rate.
Your credit report represents a long list of your payment history, credit accounts, and other information.
Your credit reports are available for free at annualcreditreport.com, however your credit score is not included, and would normally have to be purchased.
The FICO score is named after the company that developed it—Fair Isaac and COmpany and you can get that score for a stated fee at (www.myfico.com).
The score is a three-digit number that falls between 300 and 850 and the higher your number, the more confidence lenders will have in your repayment ability.
Although other companies provide credit scores, the FICO score is the most prominent score used in the credit industry.
Your score will fall into a basket with other scores and it is important to know that generally more than 60% of people will have scores of 700 or more—therefore if your score is below 700, you have work to do if you desire to get in the TIER 1 range.
At 720 or higher (depending on the lender and type of loan), you would be considered a safer risk and you would generally receive a loan without a problem and also at a lower interest rate.
Your FICO score is weighted as follows:
- 35% Payment history. Having a long history of making payments on time and no missed payments on all credit accounts is very important and one of the top things that creditors look for.
- 30% Utilization or amount owed. The amount that you owe relative to all of the credit that you have available is your overall utilization rate. If you are very close to the limit on all lines of credit, you will be deemed a potential risk in the ability to repay your debt on time with many lenders.
- 15% Time length of credit history. In general, you want a credit report containing a list of accounts that have been opened for a long time–as that will help your credit score. Your credit score would be enhanced by having older account(s) and the average age of all of your accounts would be weighted more favorably as well.
- 10% Type of credit in use. Your credit type or mix of credit cards, retail accounts, finance company loans, auto loans and mortgage loans are evaluated and weighted when your credit score is analyzed.
- 10% Inquiries or new credit. If you plan on opening several new credit accounts in a short period of time–use caution as that can result in the lowering of your credit score. Depending on your future goals, you may want to ease into the process of opening new credit.
Multiple credit report inquiries can represent a greater risk, but multiple inquiries “do not” include requests made by you, an employer, or a lender who sends you an unsolicited, “pre-approved” credit offer.
In addition, to compensate for rate shopping, your credit score generally counts multiple inquiries of the same loan type in any 14-day period as just one inquiry.
General Guideline of How Lenders Rate Credit Scores
TIER 1 750 or higher is “excellent”—some lenders consider 720 or higher as tier 1
TIER 2 700 to 749 is “good”—some lenders consider 660 or higher as tier 2
TIER 3 640 to 699 is “fair”—make plans to improve
- 720-higher A
- Take your choice of loans at the lowest cost, including risk-based loans such as stated Income and Interest Only. Be aware that stated Income and Interest Only loans are more difficult now even with scores over 720.
- 620-719 A-
- You qualify for conforming, conventional loans. You’ll pay slightly more for risk based loans.
- 600-619 B
- You may take a FHA/VA loan or even a low-down payment loan with desktop (automated) underwriting. FHA/VA now require a middle score of 620 or higher with many lenders.
- 575-599 C
- You can qualify for a sub-prime loan, but your interest rate will be significantly higher. Expect a prepayment penalty.
- 500-559 D
- Most lenders will deny your loan, however there are a few “hard money” sub-prime lenders who will approve a loan if you have sufficient down payment. Mortgage brokers have access to these wholesale lenders.
- Only the rare sub-prime lender will approve a loan for someone with a score below 500, and a large down payment will be required—usually 25 to 50 percent.
- Other conditions will apply as well.
- Other Key Tips:
- If your home is foreclosed—5 year moratorium on purchase of another house with many lenders
- After Bankruptcy Discharge (Chapter 13) you can apply for a loan if middle score is 620 or more.
- Chapter 7 with no foreclosure, FHA loan available after 3 years with many lenders.
- Judgments on your credit report. Judgments must be paid.
- Judgments not paid will stop the progress of your score going up.
It is important that you know prior to applying for a loan the importance of why you need to understand your credit position and how you can improve your credit position so that you can get a good—or the best loan available based on your credit profile.
By keeping in mind the above credit tiers, and knowing how to use the five credit factors to your advantage, you put yourself in position to manage your credit more effectively and efficiently at the various phases of your life.
You can make your stay on planet earth a more joyous occurrence by using credit wisely and mapping out your future with more clarity–so that you can go where you need to be, regardless of the chaos that you now see!
Now is the time that you put into motion ways to manage your credit at an optimal level and achieve the goals and dreams that are uniquely your own.
All the best to your credit management and “credit tier” success…
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