Credit sweep is used to minimize costs of having line of credit. Customer of a bank that has line of credit can define that all idle funds in a deposit account will be used to pay down short-term borrowings. Usually customer defines also the lowest state of the account that enables such payment.
Credit sweep can therefore minimize usage of credit line and subsequently minimize costs related to interest rate. As the credit line is flexible, there is no risk of losing liquidity by the customer. If more funds are required, customer can simply use money from credit line.
Credit sweep according to FCRA
Other meaning of credit sweep is a set of activities that lead to removing negative items from individual account and restore credit limit. This technique can be used in case of identity theft. However it is sometimes used illegally to deceive banks.
- Demiroglu, C., & James, C. (2011). The use of bank lines of credit in corporate liquidity management: A review of empirical evidence. Journal of Banking & Finance, 35(4), 775-782.
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