What Does Tier 3 Mean on a Credit Report?

Most people's credit scores fall into the top two tiers, which are the highest scores, but the average credit score lies in the third tier as of 2011, because many people with below-average scores have such poor credit that they drag the national average down. Having a credit score that falls into the third tier probably won't prevent you from obtaining credit, but it likely will cost you thousands of dollars more for a loan than someone in the excellent score range.

Identification

In a typical credit score bracket, the third tier usually includes scores between 675 and 699, according to Personal Finance Strategy. Credit scoring tiers are not standardized, so each lender sets his own credit scoring tiers. Across the board, tier three means you have a "fair" or average score. The third tier, however, almost never goes below a score of 620.

Effects

If you fall into the third tier of credit scores, you can expect to pay about half a percentage point more for a mortgage than someone in the upper tier, according to the Bankrate website. This may not seem like a lot, but it can become a significant amount of money in the long term. On a $1,000-a-month mortgage payment, for example, an extra 0.5 percent would mean an extra $50 a month, $600 a year or $18,000 over the length of a 30-year mortgage term. On unsecured lines, the difference will be greater.

Credit Crisis

With the housing bubble bursting in 2008 and the following credit crisis, being in the third tier is more costly in 2011 and might make you too risky for a lender to offer you credit. Before 2008, a score of 620 was high enough for you to get a mortgage at close to the best rate. In 2010, a 680 score was often the cutoff between prime and sub-prime--borrowers who receive worse rates. Thus, it is critical to get a score above 740 to secure a home mortgage loan at an affordable rate.

Tip

Review your credit report to determine the elements that are preventing you from entering the top tier. Disputing errors provides an immediate boost if the dispute results in the elimination of negative data. Credit scores have many variables, but paying bills on time always has a beneficial effect on your score.

If you plan to take out a mortgage, expect to pay a premium when purchasing a home in a depressed market even if you have an excellent credit score, according to the Bankrate website.