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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.
BrickBack-Banks often do an extensive bank credit check in order to extend or approve a bank credit loan like a mortgage.
Currently lending standards have tightened and those with a credit rating below 720 may have difficulty obtaining a bank credit loan.
Also, interest rates are higher for those with blemishes in their credit rating. Some bank credit cards can have interest rates as high as 24%. This makes getting out of debt harder because so much of the payment is devoted to the interest payment.
Banks often raise interest rates on those borrowers with an adverse credit history. Sometimes the bank might refuse to extend credit at all.
In this case, it is best to
obtain a secured credit card that is guaranteed by another bank account. Here the credit limit is low, and the borrower removes the risk to the bank by freezing the funds in a bank account.
The bank card credit limit is identical to the amount in the account. The bank can transfer funds from this account in order to satisfy the debt. This way the bank has no risk and the person with bad credit can slowly rebuilds their credit rating.
When looking to obtain a bank credit line or a bank credit loan it is best to eliminate or reduce all other debt in order to provide a more favorable credit profile.
The more favorable the credit profile the more likely you are to obtain a loan for the amount and terms that you seek.
When a bank extends a bank credit line whether in the form of a credit card or a home equity line of credit, home equity loan, auto loan, or personal loan, it does so after it reviews the borrower’s credit profile.
This includes the applicant’s income, the debt to credit ratio, and the overall credit rating. If the applicant is seeking
a home equity loan or a home equity line of credit, the bank will also consider the market value of the home and the available equity in it.
A loan to value minimum is usually at least 80%, meaning that there has to be at least 20% equity in the home before the bank will consider an equity line.
Most banks will not surpass the home’s equity because this would result in negative amortization. This would make the loan valued higher than the value of the home. An appraisal is usually done to verify the market value of the home.