What Does Tier 1 Mean for a Consumer Credit Score?

Not being in the top tier of credit score means you pay much more in interest on loans even if you have above-average credit. A borrower with a few more credit score points than another does not always mean he is a better borrower than the other, so most lenders lump borrowers into categories or tiers.

Identification

A Tier 1 credit score puts you in a lender's highest-rated credit score category. The top tier changes in time, often with the state of the economy and lending sector, and with whatever financial institution you choose. A good rule of thumb is that anything above 750 to 760 falls in the top tier for most lenders, according to Wallet Pop. Some lenders might offer super-premium rates for scores above the 800s or "Tier 1 plus."

Benefits

The most important aspect of tier credit is the low interest rate. To give an example of how much bad credit costs borrowers, take a $15,000 auto loan. A borrower with good credit can probably get an annual percent yield of 8.5 percent, while a bad or sub-prime borrower usually pays about 21 percent. This works out to about $1,020 extra per year, or $5,100 over the life of the standard five-year auto loan.

Considerations

You might be able to overcome a credit score in the second tier and get the best interest rate by lowering your debt-to-income ratio. Lenders also factor in your monthly bills and monthly income in the underwriting process. If you have an extremely low DTI---lenders usually won't offer credit to someone with a DTI higher than 35 percent---the creditor usually forgives the borrower for less-than-excellent credit.

Tip

Most borrowers can enter the top tier of credit scores by paying off as much debt as soon as possible and always meeting the minimum pay on all accounts. Pay off credit card debt first, because the ratio of balance outstanding-to-limit available is an important part of the "amounts owed" category in the FICO model. When you have one or two negative items, such as a 30-day missed payment, the lender might reverse this standing with the credit agencies, particularly when you have a long history with the lender and rarely miss payments.