Lenders use credit tiers to decide the cost of loans because the tiers determine what interest rates they will charge loan applicants. Lenders divide the tiers in similar ways, but they can change them at the lenders' discretion. Furthermore, there's no guaranteed interest rate assigned to credit tiers no matter what type of credit rating a borrower has.
Interest Rates
Most lenders apply tiered pricing to loans based on borrowers' credit scores, according to Bankrate.com. However, there are no industry-wide rules for dividing credit tiers because lenders choose their own cutoff points. Some lenders may charge a higher interest rate to a borrower who has a credit score below 700. Other lenders may not charge a higher rate unless a borrower's score is below 690.
Credit Scores
FICO credit scores can be as high as 850. But borrowers who have scores of 740 or higher are generally in the top credit tier and get the best loan rates. Consumers who have lower credit scores can work on raising them by reducing their debts and ensuring that they pay bills on time. Yet a Bankrate article titled "How Credit Scores Impact Your Mortgage Rate" warns that there are times when raising a credit score won't affect loan terms: Someone who attempts to raise his score from 760 to 800 likely won't get better loan terms even if he manages to increase his score.
Tier Divisions
Auto loan customers with scores of 720 or higher can expect to find themselves in the first tier and should have access to the best rates for auto loans, according to Edmunds. The third tier included credit scores ranging from 670 to 699. The fourth tier, with some of the highest loan rates, included car buyers who had credit scores ranging from 630 to 669. Lenders generally classify people who have credit scores of 619 or below as subprime borrowers. They usually have a more difficult time getting loans without paying high interest rates.
Considerations
No matter what credit tier you're in, it's worth comparing interest rates at various financial institutions. A significant difference can be noted in interest charges even for people with credit scores in the fourth tier. For example, people who got five-year auto loans at banks in 2010 paid about 8.45 percent in interest charges, but credit unions charged an average rate of 7.68 percent, according to Edmunds. Adding even a third of a percentage point to a $165,000, 30-year mortgage results in more than $11,172 in additional interest charges over the life of the loan, according to Bankrate.
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