A change of 0.3 percent on your loan's interest rate can mean thousands of dollars in extra finance charges. Getting a better rate means moving up in the lender's credit score tier chart. If you want the best rates, you should aim to enter into the creditor's top one or two tiers.
Identification
Instead of tying interest rates to specific credit scores, most lenders break FICO scores into ranges and give anyone in a particular range the same interest rate. Tier one and two scores are "good" and "excellent" categories respectively, and anyone in them should receive the best possible rates, according to Kiplinger.
Features
What scores tiers one and two encompass vary from lender to lender, but they tend to average out across the industry. Scores between 700 to 719 are usually considered tier two, while 720 and above are generally the top tier. FICO scores between 675 and 699 are average, with anything below 674 considered "subprime."
Benefits
Although the difference in interest rates between tier one and two scores can be small, it will add up to huge savings on large loans with a long life. If, for instance, moving up from tier two to tier one saves $20 a month on a 30-year loan, this comes out to a total of $7,200.
Tip
The 2008 credit crisis ended the surplus of cheap credit during the early part of the decade, so lenders may require a 760 or above to enter the top tier. The fastest way to move up the ranks is to look for errors in your credit report and pay down as much of your existing debt as possible, suggests Liz Weston of MSN MoneyCentral.
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