If you plan to apply for a car loan at a dealership in the near future, it is wise to get an idea of the credit evaluation techniques auto lenders use. Car lenders commonly use a tier system to gauge borrower credit and decide on a loan package. Understand what it means if a lender tells you that you fall into the Tier 3 credit category.
After checking your credit the car dealership or proposed financing company will categorize your application into one of four main tiers ranging from tier one to four. The tier is just language that defines whether you have A-plus (excellent) or a problematic credit profile. The tier level is usually based on your FICO credit score.
Tier 3 Credit
If you have Tier 3 credit, that is about equivalent to a credit score of between 581 to 659. If your credit application was graded like a test, Tier 3 credit would have a grade of “C.” While it is commonly an acceptable credit level to secure a card loan, it often comes with higher rates compared to Tier 2 (B) and Tier 3 (A) credit.
Improving Tier Level
If you pull your own credit score before visiting a dealership and know that you have Tier 3 credit, you can take steps to try to boost your tier level before applying for a loan. Firstly, dispute incorrect items on your credit report to have them removed. Negotiate a settlement with creditors that show overdue or charged-off accounts to get the account status changed to “paid” on your credit report. However, significantly improving your credit score to advance to a higher tier level can take months.
A car financing company may ask you to put a higher down payment to get approval for a car loan with Tier 3 credit. So save up as much money as possible to put down when you find the car you want—ideally you should save at least 10 percent of the estimated price of the car you want to buy for a down payment. Income is also a consideration when an auto lender is considering your application. The lower your existing debt-to-income ratio (currrent monthly debt divided by monthly income), the better your chance of approval.