In a world where credit is king, your credit rating and tier level can have a significant impact on your ability to secure loans for mortgages and cars, how much interest you pay on such items, and your capacity to get credit cards or lines of credit. Having Tier III credit, which is considered below average, it may be challenging to obtain credit. Lenders view this as a slippery slope -- either they'll improve their credit or it will deteriorate further.
What Is Tier III Credit?
In accordance with the way the Fair Isaac Corporation, or FICO, credit model determines credit levels, if you have Tier III credit, your credit score falls somewhere between 560 and 619. The national average is 692, according to the credit rating agency Experian. Although Tier III is not the lowest tier, it's not that much better; in fact, it places you right on the cusp of slipping into an even lower credit tier. To put these figures into context, those classified as having a Tier IV rating have a poor credit score of 500 to 559, while individuals with Tier I, or excellent, credit have FICO scores of between 720 and 850.
Common Characteristics of Those with Tier III Credit Scores
People with Tier III credit often have less than five years of credit history; high credit card balances; a history of late loan, mortgage or credit card payments; a bankruptcy that occurred at least two years ago; and also may have some accounts in collections. What's more, economic recessions, such as the one occurring from 2007 to 2009, wreak havoc with many Americans' finances, affecting their ability to make payments on time and increasing the likelihood they'll incur more debt. This is unfortunate, because a full 65 percent of what determines your FICO credit score includes your payment history, which makes up 35 percent, and outstanding debt, which makes up 30 percent.
Effects on Credit and Loans
While Tier III credit does not automatically disqualify you from obtaining credit, mortgages or auto loans, it does make it harder and more expensive. For example, you might qualify for a credit card, but your interest rates will be higher than those with better credit. As for home and auto loans, your FICO ranking will impact the amount a lender will let you borrow, and they will most likely require you to make a higher down payment, as well as saddle you with higher interest rates. Generally speaking, the higher your credit score, the lower your monthly payments will be.
Finding Your Credit Score
Before you decide to apply for an auto, personal or mortgage loan, you should learn what your credit score is. By law, the federal government mandates that every American may obtain a free copy of their credit report from all three of the major credit reporting agencies -- Equifax, Experian and TransUnion. Each company applies a different set of criteria to determine your FICO credit score, so it's not uncommon for your credit rating to vary slightly. In such cases, the potential borrower typically uses the middle figure when making their lending decisions.
Another reason to review your credit standing annually is to look for identity theft, which would definitely result in a lower credit score. Signs of theft you might find on your credit report include credit cards that you didn't open and high balances on cards you rarely use.
Improving Your Credit Tier
If you discover that you have a Tier III rating, there are actions you can take to repair your credit. For instance, you can immediately pay off any accounts that are in collections. You may also turn to a credit counseling or restoration company if you need help resolving your credit problems. Once you clear all collections, it's important to get them removed from your report by working with each reporting agency. And, if you discover identity theft, you can begin to remedy the situation by alerting each company to the problem and taking the steps necessary to dispute fraudulent information.
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