When you apply for a loan, your potential lender will take a good, hard look at your credit score. Whether it's a bank, car dealership or retail store, the business has lending guidelines that will decide if you're approved. Because the numbers issued by credit-rating agencies may vary, lenders need a more consistent "in-house" system. To solve the problem, many use tier ratings, with Tier III representing the lowest credit ranking.
The Why and How
Each of the three major US credit bureaus -- Experian, TRW, TransUnion and Equifax -- use a system to check your credit history. As a result, your credit score can vary (widely) from one bureau to the next. To simplify his own approval process, a lender may set up three separate tiers to rank score ranges. In most tier systems, Tier I represents the strongest credit rating.
Tier III Loan Terms
There's no legal requirement or guideline regarding tier systems. Some companies use three, while some use more. In general, Tier III represents an average credit score in the low to middle 600s, meaning relatively unfavorable terms for the borrower. Auto lenders may extend credit for Tier III borrowers, but at expensive "sub-prime" rates of interest. Some lenders won't approve a Tier III applicant at all without a sizable down payment or a co-signor on the loan.
Impact
Most lenders look at additional credit data during the approval process. Even with the others come back positive, the Tier III rating and a higher interest rate can be costly. The website CreditSense.com ran the numbers on a 30-year, $216,000 mortgage, for which a theoretical borrower with top-tier credit paid 3.54 percent, the lowest tier paid 5.12 percent. The latter borrower paid an additional $202 a month, $2,424 a year or $72,720 over the life of the loan.
Requesting Your Report
Before you head off to borrow money, request a current credit report; credit scores run from 300 to 850 for most bureaus. The Fair Credit Reporting Act gives you the right to a free report once a year at annualcreditreport.com. You can dispute items on the report, if you have supporting evidence; a correction on your report can mean a promotion from Tier III to a Tier II rating and a big savings on your loan.
