Bank Loans: Interest Rates and Credit Scores
What options are banking institutions offer?
The annual interest rate for loans is small, usually 3-5% per annum. Some time after moving to the states, I took out a loan of $2,200 for 20 months to buy the first motorcycle. I have to make a reservation that I did not really need these 2,000 as such. At that moment, I decided it was a good idea to build my credit history.
The full overpayment on the loan for this period amounted to $73,00. After about 10 months, I realized that there was little sense in this undertaking and immediately paid off the entire principal amount of the debt, so the bank earned me about $50,00.
Mortgages are taken for 20-30 years at 3-4% per annum. The overpayment is relatively small.
Before you begin to talk about the credit history, you need to talk about such a thing as a “Social Security Number” or SSN. Every American and those who work in the states have such a number. This number is the key to almost all personal information about a person, so all Americans know this number by heart and do not tell anyone. In particular, by knowing this number, you can find out the whole personal credit history.
There are two main companies in the states that aggregate credit information: Equifax and Transunion. Each time you take a car on credit, open a new credit card, make a loan payment, etc., all this information is sent by banks to these two organizations. Based on a dozen parameters, these companies calculate your credit rating.
Factors that influence credit history:
- Percentage of credit funds’ use. It is believed that the less you spend borrowed funds, the better your financial situation is. An excellent case is when you spend on average no more than 15-20% of your credit limit. In this case, your points will grow in the fastest way.
- Payment history. Ideally, you should have 100% payments. Each payment that you missed will greatly lower your points.
- Fine marks. Ideally, you should have no fine marks. If you do not pay a loan on time, then credit organizations can add these marks to your history. Each such mark remains in your history for 7-10 years and greatly lowers your credit rating.
- The age of your story. The older the average age of your open credit accounts, the better it is. Good age is of 7-8 years. The influence of this factor on the scores is average.
- The total number of credit accounts ever opened. A good amount is 11+. The effect of this factor on the scores is low.
- The number of requests for your credit history. Before deciding whether to approve a loan or not, the bank will ask for your story. Such a request is called hard inquiry. Each such request reduces your points.
It is believed that if you have a lot of such requests, it means that you are not doing well with money. Requests remain in the system for 2 years. The effect of this factor on the scores is low. It is strongly discouraged to frequently make requests for a credit card, each such request, even if the answer is yes, will lower your rating by a certain number of points.
How to build a credit history?
At that moment, when you decide that it is time for you to start taking loans, for example, for a car. Your credit history will be completely empty. Banks will not issue loans to such people, since there is no information about you. How then to start creating a credit history if no one approves you a loan?
There are at least two ways to do this:
- Secure deposit. In the event that the banks do not want to give you their money for use, then you can give the bank your own and start using it as if it were bank money according to all the rules. In a number of banks, for example, there is such a service. You put any amount in the bank, for example $500,00. The bank issues a card to you and you begin to use it. The bank sends all your credit statistics to the company aggregators. This method is the most effective and will allow you to get good credit points in less than a year.
- A number of major automakers for professionals without a credit history, issue cars on credit or leasing. At Nissan, in order to buy a car on credit, you need to earn more than $67,000 a year. But this method is not very effective. Points will grow by 1-2 per month.