Tier 2 credit approval is granted to borrowers with acceptable but not optimal credit histories. While getting approved under Tier 2 credit means you will be able to finance a purchase, the terms will not be as generous as if you had better credit. If you make all of your payments on time under a Tier 2 financing arrangement, your credit score should rise, possibly allowing you to qualify for better terms on your next loan.
While the industry-standard credit scoring model is the FICO score, many companies use different scoring models to assess customer credit. For example, Equifax, one of the three major credit reporting agencies in the U.S., uses a formula known as the BEACON score, and some car- and home-financing lenders use proprietary models. Regardless of the scoring model used, Tier 1 is usually the highest scoring range available, with the occasional classification of Tier 0 as the top score. Using the FICO scoring model, in which credit scores range from 350 to 850, scores of 660 to 700 typically qualify for Tier 2 credit.
Higher interest rates are the typical consequence of qualifying for Tier 2 credit instead of a higher tier. For example, if Tier 1 credit rates for a home improvement loan are 7.99 percent, Tier 2 rates may be in the neighborhood of 9.99 percent. Depending on the length of the loan and the amount of money you borrow, this could cost you a substantially larger amount over time.
Ways to Improve
To qualify for higher-tier credit and lower interest rates, you must improve your credit score. Your FICO score has five components, with payment history, amount owed and length of credit history collectively accounting for 80 percent of the score. If you keep your debt balances low and have a long history of on-time payments, your credit score should move toward the top tier. Having a variety of credit accounts, such as car loans, a home mortgage and credit cards will also contribute to a rising credit score, as will limiting the amount of new credit you apply for.
Although your credit score helps lenders decide what credit tier to offer you, they are not bound to extend you credit simply based on your score. Many companies have finance departments that consider a credit score just one of many variables in the financing process.
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