Bank credit has to do with the amount of funds that an individual or a
business may be able to borrow from one or more lending institutions. In
effect, it is a measure of how much in the way of cash loans may be issued,
based on the credit
history and the assets of the company or person. Because bank credit focuses on the borrowing
capacity of the individual or business entity, the premise is a little
different than the extension of a line of credit. First, this type of credit
has to do with loans that are taken out for specific purposes, rather than
general purposes. Second, they often involve some sort of
collateral that helps
to ensure the repayment of the loan in the event of default.
A basic philosophy of the banking system is that when money is loaned out,
there must be a reasonable expectation of repayment of the loan, plus interest.
This means that looking at the overall financial status of the applicant is
important. Assets such as property, savings and stock accounts, current
indebtedness, employment status and annual net salary or wages, and
overall credit
rating are all components that factor into determining the bank credit of
the applicant. This is a far more comprehensive approach than is normally used
for the issuing of a credit
card.
Understanding the importance of bank credit often becomes apparent when
applying for a mortgage
to finance the purchase of a new home. Depending on the overall financial
health of the prospective homeowners, there may or may not be a sufficient
level of bank credit to allow the approval of the mortgage. This may be true
even if the applicant can demonstrate a steady source of income and is not in arrears on any current
financial obligations.
There are some ways to improve a bank credit rating. First, look at credit
card debt and eliminate it if at all possible. Also, cut down on the number of
open credit card accounts. The combined worth of your lines of credit will
impact your rating. Fewer credit cards means less potential to incur large
balances that would hinder repayment of a loan or mortgage. Keep one or two
credit cards and pay them off each payment cycle. This maintains a healthy
credit record and will reflect favorably on your bank credit and will increase
your borrowing power with your local financial institution.