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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, bank credit 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. Here is some information about how bank credit works, and why knowing your bank credit rating may be very important.

A credit rating is a simple number which many lenders use to determine whether or not they will give a loan or line of credit to an individual. One's credit rating is impacted by a number of factors, some of which are controllable, others of which are not.

There are three main agencies lenders go to in order to acquire an individual's credit rating: TransUnion, Equifax, and Experian. Many lenders get two or more reports, as details may differ among the agencies. Opinions differ as to which of the agencies is the best or most accurate, with factions holding strong opinions on both sides for all three of the major agencies.

The formula used by these three agencies is known as FICO, named after the Fair Isaac Credit Organization, one of the first companies to begin using credit ratings in the 1950s. A FICO score is a number ranging from 300 to 900, and roughly approximates the risk an individual poses to a lender. A rating of 300 is considered extremely high risk, while 900 indicates virtually no risk.

The FICO score is calculated based on the percentage of your total credit you are currently utilizing (approximately 30% of the FICO score), how long you have had lines of open credit (15%), the types of credit lines you have (10%), how large your past lines of credit have been (10%), and your number of delinquent payments (35%).

As a rule of thumb, a credit rating around 500 is high enough risk that many lenders will refuse a line of credit, and those that do grant one will penalize the borrower with high interest rates and difficult terms. A credit rating above 850 will grant the lowest possible interest rates and a very small down payment where applicable. A credit rating of over 650 is good enough to get favorable terms and virtually always be accepted for new lines of credit.

Many organizations offer online access to your credit rating. These sites offer reports from all three major agencies, detail why your score may be low, and offer suggestions for how to improve it. This ready access to one's credit rating information has led to the emergence of many online forums and communities in which members encourage and assist one another in raising their credit ratings.

Given the importance of favorable interest rates and terms — particularly on large credit lines, such as mortgages — it is well worth investing the time and small sum of money involved in acquiring access to your credit rating. By the end of September 2005, everyone will be able to get one free copy of one's credit report from each of the three major agencies. In fact, in many states, consumers already have this right. Even people with a relatively strong credit rating (above 700) will find marked improvements in terms as they raise their credit rating.

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, bank 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 bank credit 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.---wisegeek.com