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.