What Is a Credit Sweep?
A credit sweep is also known as an automated credit sweep. This term refers to an arrangement between a bank and a customer (usually a corporation) whereby all idle or excess funds in a deposit account are used to pay down short-term debt under a line of credit. The client usually sets a target balance that will determine how much of its funds will be used. This greatly helps a client reduce its costs paid through interest on outstanding debt.
Key Takeaways
- A credit sweep is an arrangement between a bank and customer whereby any excess funds in an account can be used to pay down the customer's debt.
- This type of arrangement is set up automatically and helps customers reduce their costs paid through interest on outstanding debt.
- Credit sweeps are offered by banks as a cash management tool to help customers manage their accounts.
- Banks often use sweep accounts to help customers earn interest on their idle cash.
Understanding a Credit Sweep
A credit sweep is a cash management tool that is especially beneficial to large corporations that have multiple accounts and great variability in payments from day-to-day. If the balance in a deposit account is above a target balance, a credit sweep account can be set up to automatically transfer the excess funds in the account to pay down the outstanding amount on a loan.
Most credit sweeps also have the opposite arrangement, whereby if the funds in the account are less than the target balance, there will be a drawdown on the line of credit to reach the target. The "sweep" part of a credit sweep is financial jargon; as in, the bank "swept" the remaining balance in one account to another.
Example of a Credit Sweep
Company ABC has a line of credit with Bank XYZ in the amount of $1 million. Currently, ABC is borrowing $300,000 of the $ 1 million, which needs to be repaid. ABC also has a cash deposit account with Bank XYZ that is used to make regular business payments or used for any other business purposes. Company ABC sets up a target balance that stipulates that any amount in the deposit account that is over $285,000 on any given day, can be used to pay down the outstanding $300,00 loan. During one week, on a Friday, the amount in the deposit account is $295,000, so Bank XYZ uses the additional $10,000 above the target balance to pay down $10,000 of the $300,000 borrowed amount.
Sweep Accounts in Banks
On a more technical level, banks use sweep accounts as a legal workaround on the prohibition of paying interest on business checking. By "sweeping" funds overnight to an investment vehicle of some sort, idle cash can be more effective in generating marginally more return. Sweep investment vehicles are often tied to the money market, or more specifically, "Eurodollar Sweeps" and "Repo Sweeps."
There are many forms of sweep arrangements. Commercial banks can afford more sophisticated arrangements, so they enjoy more aggressive strategies, which usually offer a higher rate of return. Smaller entities might use a sweep account simply out of convenience. As such, various levels of service are common when setting up a sweep arrangement.
FAQs
A credit sweep is also known as an automated credit sweep. This term refers to an arrangement between a bank and a customer (usually a corporation) whereby all idle or excess funds in a deposit account are used to pay down short-term debt under a line of credit.
How do you explain a sweep account? ›
A sweep account automatically transfers cash funds into a safe but higher interest-earning investment option at the close of each business day, e.g., into a money market fund. Sweep accounts try to minimize cash drag by capitalizing on the immediate availability of higher-interest accounts.
How to do a clean sweep on your credit report? ›
How to Clean Up Your Credit Report
- Pull Your Credit Reports. ...
- Go Through Your Credit Reports Line by Line. ...
- Challenge Any Errors. ...
- Try to Get Past-Due Accounts Off Your Report. ...
- Lower Your Credit Utilization Ratio. ...
- Take Care of Outstanding Collections. ...
- Repeat Steps 1 Through 6 Periodically.
A sweep-in facility ensures that whenever funds in your Savings Account are running low for a purchase or transaction, the bank will transfer the deficit amount from your Fixed Deposit to your Savings Account without affecting your interest rate in your Fixed Deposit.
Are credit sweeps legit? ›
Credit Sweep Fraud
As John puts it, it is clear that credit sweeps are fraudulent and illegal. Not only are you lying to the CRAs, but also to the police, and filing a false police report is against the law.
What are the disadvantages of sweep account? ›
Penalties: The biggest drawback of sweep accounts is the penalty for early withdrawal. Sometimes, the penalty may lead to less earnings than savings bank interest.
What is a sweep in Credit on a bank statement? ›
The “sweep-in" facility allows your bank to transfer any sum in excess of the amount stipulated by you from your savings account to a sweep-in deposit. The tenure of the deposit varies from one year to five years, and the interest rates also vary accordingly.
How much interest does a sweep account pay? ›
Bank Deposit Sweep Program Rates
| Cash Balance | Interest Rate 1 | Annual Percentage Yield (APY) 1 |
|---|
| $100,000 – $249,999 | 0.50% | 0.50% |
| $250,000 – $499,999 | 0.95% | 0.95% |
| $500,000 – $999,999 | 0.95% | 0.95% |
| $1,000,000 – $4,999,999 | 2.00% | 2.02% |
5 more rows: a victory in which one side or team wins every game, contest, etc. The Red Sox won the series in a clean sweep. The election was a clean sweep for local Democratic candidates. The new governor has made a clean sweep of the staff in the governor's mansion.
How to get a 700 credit score in 30 days? ›
15 steps to improve your credit scores
- Dispute items on your credit report. ...
- Make all payments on time. ...
- Avoid unnecessary credit inquiries. ...
- Apply for a new credit card. ...
- Increase your credit card limit. ...
- Pay down your credit card balances. ...
- Consolidate credit card debt with a term loan. ...
- Become an authorized user.
The sweep will claim the items are fraudulent, usually as a result of identity theft. However, unless all items on your credit report are fraudulent (which is improbable), a credit sweep is illegal. While credit card fraud statistics show that fraud cases continue to increase, a credit sweep is not the answer.
What is sweep payment? ›
Sweeping payments allow you to send funds between two bank accounts in your name, (which are the main 9 FCA regulated banks within the U.K, also known as the CMA9)
How safe are sweep accounts? ›
When using a bank deposit account as a sweep vehicle investment, invested funds are generally covered by FDIC insurance up to the first $250,000 in balances per bank, for each bank in which the customer has funds deposited.
Can we withdraw money from sweep in account? ›
This procedure is referred to as sweep-in. Remember that both these accounts will receive their interest earnings. But, it does not mean you cannot withdraw the excess amount. In other words, a sweep-in facility does not result in a loss of liquidity of the amount transferred.
Is a sweep account a good idea? ›
The primary advantage of maintaining a sweep account is the ability to earn a return on excess cash instead of letting it sit idle while also ensuring there's enough cash on hand to pay for operating expenses. Minimal work needed to maintain. The automation provided by sweep accounts makes the process simple.
What is the risk of a sweep account? ›
This account is called an omnibus account. It makes it riskier for the customers as they stand to lose the whole amount if the institution falls. It is also important to understand that the FDIC insurance is limited to $250,000 and an amount beyond that has to be invested on the investor's own risk.
Do you make money in a sweep account? ›
Sweep accounts allow you to earn interest on money that you're not actively saving or investing. These accounts work by transferring unused funds into a high-yield savings or investment option at the end of each business day.
