Bank Credit

What is a 'Bank Credit'

Bank credit is the aggregate amount of credit available to a person or business from a banking institution. It is the total amount of funds financial institutions provide to an individual or business. A business or individual's bank credit depends on the borrower's ability to repay and the total amount of credit available in the banking institution.

BREAKING DOWN 'Bank Credit'

Bank credit for individuals has grown immensely over the past 50 years, as consumers have become accustomed to having multiple credit cards. Some experts predicted that the 2008 financial crisis was a red flag that meant a return to previous years, when credit, although relatively inexpensive, was difficult to obtain, especially for people with poor credit histories.

Bank credit is an agreement between banks and borrowers where banks trust a borrower to repay funds plus interest for either a loan, credit card or line of credit at a later date. It is money banks lend or have already lent to customers.

Bank credit is the total borrowing capacity banks provide to borrowers. It allows borrowers to buy goods or services. However, it requires a fixed minimum monthly payment for a specified period. For example, the most common form of bank credit is a bank credit card. Borrowers start with a zero balance and use the card to make transactions. The borrower pays off the balance and borrows again until the credit limit is reached.

Bank Credit Approval

Bank credit approval is dependent upon a borrower’s credit rating and income or other factors such as assets, collateral or total existing debt obligations. There are several ways to ensure approval, such as reducing the total debt-to-income ratio. An acceptable debt-to-income ratio is 36%; however, 28% is ideal. Borrowers ought to keep card balances at 20% or less of the credit limit and pay off all late accounts. However, banks offer credit to borrowers with poor credit histories with terms that are the most favorable to the banks but the least favorable to borrowers.

Fees

Bank credit comes at a cost. The cost and terms vary by bank, credit type, the borrower’s credit rating and the purpose of the funds. There are two types of bank credit secured and unsecured. Both have different requirements, fees, interest rates, terms and conditions and regulations. Fees include the amount borrowed plus interest and other charges. Some fees are mandatory, such as interest rates; some are optional, such as credit insurance; and some are event-driven, such as late payment fees.

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U.S. Bank Credit Cards

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U.S. Bank Altitude™ Reserve Visa Infinite® Card

U.S. Bank Cash 365™ American Express® Card

U.S. Bank Cash+™ Visa Signature® Card

U.S. Bank Visa® Platinum Card

U.S. Bank Business Edge™ Cash Rewards World Elite™ MasterCard®

U.S. Bank Business Edge™ Platinum

U.S. Bank Business Edge™ Select Rewards

Deeper analysis on the best U.S. Bank cards

U.S. Bank Altitude™ Reserve Visa Infinite® Card

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Good Credit

What is 'Good Credit'

Good credit is a classification for an individual's credit history, indicating that the borrower has a relatively high credit score and is a safe credit risk.

BREAKING DOWN 'Good Credit'

Good credit is determined by a borrower’s credit score. Credit scores are provided through credit reporting agencies. Lenders check credit scores for the purpose of providing credit underwriting decisions and background check details.

Credit Quality Classifications

Credit rating agencies assign a score to an individual based on their credit history which is tracked by agencies in a credit report. Credit scoring can vary according to the methodologies used in calculating the credit score. The most commonly used credit score is the FICO Score.

A borrower’s credit score can range from 300 to 850. Lenders will identify credit score classifications by various categories. Typically credit scoring classifications can be broken into five tiers. These tiers include exceptional, very good, good, fair and poor. Borrowers with a good credit score could be in any one of the top three categories. According to a breakdown from Experian, exceptional credit borrowers will have a score ranging from 800 and higher, very good borrowers will have a score ranging from 740 to 799 and a good borrower will have a score ranging from 670 to 739. Therefore, borrowers with a credit score of approximately 670 or higher are considered good credit score borrowers and have the best chance of receiving credit approval from a lender.

The last two tiers include fair and poor. These two categories refer to subprime borrowers. Fair borrowers will have a credit score of 580 to 669 and poor encompasses borrowers with a credit score of 579 or less.

Borrower Considerations

There are a number of factors that influence a borrower’s credit score. If a borrower is in the lower tiers and seeks to improve their credit score so that they fall in the good credit classification there are a few important things they can consider. Credit scores are substantially based on a borrower’s payment history. Any delinquent payments will affect a borrower’s credit score and remain on a credit report for seven years. Thus, making payments on time with no further delinquencies can help a borrower to see monthly credit score improvements.

One factor that can help to quickly improve a borrower’s credit score is the amount owed overall. Total utilization accounts for approximately 30% of a borrower’s credit score. Therefore, if a borrower can significantly pay down outstanding debt balances then that can rapidly improve their credit score month over month.

Other factors involved in the credit scoring methodology include length of credit history, types of credit used, new credit and credit inquiries. Borrowers seeking to improve their credit score should be cautious about the new credit they take on and the number of credit accounts they apply for. A high number of hard inquiries in a short amount of time can negatively affect a borrower’s credit score and increase their perceived risk of default to lenders.

Lender Considerations

A borrower’s credit score is a significant factor influencing the type of credit that they will be eligible to be approved for. Traditional lenders generally focus on the good credit quality borrowers. This means they will typically only consider borrowers with good credit, reporting a credit score of 670 or higher. These good credit quality borrowers are more likely to receive loan approvals overall. They are also more likely to receive more favorable loan terms than lower tier borrowers which often have to seek alternative lenders or secured credit cards.

Credit Limit

What is 'Credit Limit'

Credit limit refers to the maximum amount of credit a financial institution extends to a client through a line of credit as well as the maximum amount a credit card company allows a borrower to spend on a single card. Lenders usually set credit limits based on information in the application of the person seeking credit.

BREAKING DOWN 'Credit Limit'

Credit limits are determined by banks, alternative lenders and credit card companies based on several pieces of information related to the borrower. They examine the borrower's credit rating, personal income, loan repayment history and other factors. If the line of credit is backed by collateral, the lender takes into account the value of the collateral. If someone takes out a home equity line of credit, for example, the credit limit varies based on the equity in the borrower's home.

How Do Credit Limits Work?

Whether a borrower has a line of credit or a credit card, the credit limit works the same way. Essentially, a borrower may spend up to the credit limit, but if they exceed that amount, they typically face fines or penalties in addition to their regular payment. If a borrower has spent less than the limit, they can continue to use the card or line of credit until they reach the limit. Credit limit and available credit are not the same thing.

If a borrower has a credit card with a $1,000 credit limit, for example, and they spend $600, they have an additional $400 that they can spend. If the borrower makes a $40 payment and incurs a finance charge of $6, their balance falls to $566, and they now have $434 in available credit.

Can Lenders Change Credit Limits?

In most cases, lenders reserve the right to change credit limits. If a borrower pays their bills on time every month and does not max out the credit card or line of credit, a lender is likely to increase the line of credit, which has a number of benefits. In contrast, if the borrower fails to make repayments or if there are other signs of risk, the lender may opt to reduce the credit limit.

How Do Credit Limits Affect Credit Scores?

On credit reports, each file in relation to a credit card or line of credit shows the credit limit of the account, the high balance and the current balance. Unfortunately, having a high credit limit and multiple lines of credit may have the effect of hurting a person's overall credit rating. In these cases, new potential lenders can see that the applicant has access to a large amount of open credit. This fact sends a red flag to the lender simply because the borrower may opt to max out his lines of credit and credit cards, overextend his debts and become unable to repay them. Because high credit limits have this potential effect on credit scores, some borrowers occasionally request that creditors lower their credit limits.

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Bad Credit

What is a 'Bad Credit'

Bad credit describes an individual's credit history when it indicates that the borrower has a high credit risk. A low credit score signals bad credit, while a high credit score is an indicator of good credit. Creditors who lend money to an individual with bad credit face a greater risk of that individual missing payments or defaulting than creditors who lend to individuals with good credit.

BREAKING DOWN 'Bad Credit'

An individual's credit history is dependent on a number of factors, including the amount owed, the amount of available credit and the timeliness of payments. An individual may have bad credit if he does not make timely payments or has defaulted on a loan during a period of time. Having bad credit makes it more difficult or costly to obtain loans, such as mortgages, from financial institutions.
How Credit Scores Are Determined
In the United Scores, the Fair Isaac Corporation (FICO) calculates credit scores. Using information from the three credit bureaus, Experian, TransUnion and Equifax, FICO weighs various information in strategic ways to calculate the score.

Designed to offer a quick snapshot of an individual's credit worthiness, the FICO credit score gives payment history the most weight, and it constitutes over a third of the score. Thirty percent of the score is based on the amount owed, 15% on length of credit history, 10% on the mix of credit and 10% on new credit inquiries.

Payment history refers to whether or not payments were made on time, and the amount owed refers to the total amount of debt including mortgages, credit cards, bills in collections, judgments and other debts owed by the individual. Length of credit history takes into account the oldest account noted on the credit report, while credit mix considers how many different accounts a borrower has. For example, a borrower who only has credit cards scores lower in this category than a borrower with a mortgage, a car loan, a line of credit and a credit card. Finally, new credit refers to the number of credit inquiries recently made by the individual or the number of accounts recently opened.

Credit Scores That Indicate Bad Credit

FICO scores range from 300 to 850. Traditionally, borrowers with scores at or below 579 have bad credit. According to Experian, 61% of borrowers with scores in this range are likely to default or become seriously delinquent on their loans in the future.

Scores between 580 and 669 are labeled as fair. Only 28% of these borrowers are likely to become seriously delinquent on loans, making them considerably less risky to lend to than borrowers with bad credit scores. However, even borrowers within this range face high interest rates or have trouble securing loans.

Credit Card

What is a 'Credit Card'

A credit card is a card issued by a financial company which enables the cardholder to borrow funds. The funds may be used as payment for goods and services. Issuance of credit cards has the condition that the cardholder will pay back the original, borrowed amount plus any additional agreed-upon charges. The credit company provider may also grant a line of credit (LOC) to the cardholder which allows the holder to borrow money in the form of a cash advance.  The issuer pre-sets borrowing limits which have a basis on the individual's credit rating.

BREAKING DOWN 'Credit Card'

Credit cards have higher annual percentage rates (APRs) than other forms of consumer loans and lines of credit. Interest charges on the unpaid amount charged to the card usually begin one month after making a purchase. They remain one of the most popular forms of payment for consumer goods and services, and nearly every business allows for payment of products and services through credit cards.

Most Common Types of Credit Cards

Banks, credit unions, or other financial institutions issue most major credit cards. The major affiliated companies include Visa, MasterCard, Discover, and American Express. Many credit cards carry incentives which distinguish the cards from one another and make them more attractive to consumers. Many have rewards geared towards specific interests such as airline miles, hotel rooms, gift certificates to major retailers, and cash back.

A store may also issue a branded version of the major credit cards. These store-branded cards are specifically intended to promote customer loyalty. Often it is easier to qualify for a store credit card than for a major credit card. However, many store cards limit usage to purchases from the issuing retailer. Also, retailers may offer cardholders special discounts, notice of promotions, or special sales.

Secured credit cards are a kind of credit card, where the cardholder secures the card with a security deposit. These cards usually have a limited line of credit and may charge an annual membership fee. The required deposit is most often equal to the total line of credit. Frequently, those with limited or poor credit history will use secured credit cards. After repeated, responsible use, the issuer will refund the security deposit. These cards may also be known as prepaid credit cards and semi-secured credit cards.

Similar to a secured credit card, a prepaid debit card is a type of secured payment card. However, the funds available are only those which you or someone else has deposited into the account or the funds in the linked bank account.

In contrast, an unsecured credit card will not require a security deposit or collateral. These cards will have higher lines of credit offerings and offer lower interest rates on unpaid balances. The unsecured card is the most common type of credit card in the world.

Building Credit History with Secured Credit Cards

For consumers with damaged credit, a secured card can help the cardholder rebuild his or her credit while providing a way to make online purchases and eliminate the need to carry cash. Most secured cards report payments and purchase activity to the major credit agencies. If the cardholder uses the card responsibly, they might be able to extend their line of credit or upgrade to a regular credit card in the future.

While financial institutions want to protect themselves from potentially having to write off bad debt from cardholders with higher credit risks, they also recognize that higher risk individuals may one day turn into less risky individuals. Extending credit may thus allow the financial institution to create more business, as well as earn interest on the credit that a semi-secured cardholder borrows against.

Credit Card Debt

What is 'Credit Card Debt'

Credit card debt is a type of unsecured liability which is incurred through revolving credit card loans. Borrowers can accumulate credit card debt by opening numerous credit card accounts with varying terms and credit limits. All of a borrower’s credit card accounts will be reported and tracked by credit bureaus. The majority of outstanding debt on a borrower’s credit report is typically credit card debt since these accounts are revolving and remain open indefinitely.

BREAKING DOWN 'Credit Card Debt'

Credit card debt can be useful for borrowers seeking to make purchases which allow for deferred payment over time. This type of debt does carry some of the industry’s highest interest rates. However, credit card borrowers do have the option to payoff their balances each month in order to save on interest over the long term.

Credit Card Debt Benefits

Credit cards are one of the most popular forms of revolving credit and as such offer numerous benefits for borrowers. Credit cards are issued with revolving credit limits that borrowers can utilize as needed. Payments are typically much lower than a standard non-revolving loan. Users also have the option to payoff balances to avoid high interest costs. Additionally, most credit cards come with reward incentives such as cash back or points that can be used toward future purchases or even to pay down outstanding balances.

Credit Bureau Reporting and Analysis

Generally credit card debt refers to the accumulated outstanding balances that many borrowers carry over from month to month. Lenders report credit card debt level balances to credit bureaus each month along with a borrower’s relevant credit activity. Thus, credit cards can be a great way for borrowers to build out a positive credit profile over time. However, negative activity such as delinquent payments, high balances and a high number of hard inquiries in a short period of time can also lead to problems for credit card borrowers.

Credit card debt is highly influential in determining a borrower’s credit score since it will typically account for a significant portion of credit utilization on a borrower’s credit profile. Credit bureaus track each individual credit account by itemized trade lines on a credit report. The aggregation of outstanding credit card debt from these trade lines sums to a borrower’s total credit card debt which is used by credit bureaus to calculate credit utilization, an important component of a borrower’s credit score.

Lenders will also report a borrower’s payment activity to credit bureaus each month with delinquent payments detracting from a borrower’s credit score and on time payments helping to maintain an individual’s credit score. Maintaining on time payments helps a borrower to achieve a higher credit score and qualify for better lending terms.

Since credit card utilization is also a factor in a borrower’s credit score, paying down substantial portions of outstanding credit card debt is one of the best ways a borrower can rapidly improve their credit score. Keeping credit card balance low will also help a borrower to maintain a good credit score.