Key Takeaways
- Consumer credit is money consumers borrow and repay over time.
- Banks, financial institutions, and businesses extend credit based on a consumer's borrowing history and ability to repay.
- Consumer credit can be secured or unsecured.
- Consumers can access credit products by applying with a lender or creditor.
Definition and Examples of Consumer Credit
Consumer credit is money that consumers can borrow to pay for goods or services. Access to credit allows consumers to make purchases today and then pay for them over a period of time. Banks, financial institutions, and businesses make credit available to consumers.
Examples of consumer credit include:
- Credit cards
- Student loans
- Mortgages
- Auto loans
Federal and state laws govern consumer credit to protect consumers from unfair lending practices and prevent businesses from discriminating against them based on non-financial factors.
Note
Measuring the amount of outstanding consumer credit and periodic fluctuations helps economists gauge the health of the economy. Preliminary data as of March 2021 showed that American consumers had $4.2 trillion in outstanding consumer credit.
How Consumer Credit Works
Banks, credit card issuers, and some businesses extend credit to consumers through products like credit cards and loans. These credit products provide consumers the flexibility to pay for purchases over time, typically with monthly payments that are significantly smaller than the purchase price. In exchange, consumers pay interest to the lender.
The credit reporting system allows creditors and lenders to determine which consumers are the most ideal borrowers. Banks and credit card issuers keep track of consumer borrowing and repayment activity. They regularly share this information with credit reporting agencies, which compile all the credit information for consumers in a credit report. Credit reporting agencies then make consumer credit data available to future creditors so those creditors can determine a potential borrower's creditworthiness.
Having a history of repaying debts on time allows you to build a good credit history and, in turn, will allow you to borrow more money at better terms.
On the other hand, handling credit poorly makes it more difficult to borrow money, as lenders may not be willing to give you credit. Those that are willing to lend to consumers with poor credit history tend to charge higher interest rates and fees.
Note
You have the right to view your credit information and dispute any errors with the credit bureaus or the businesses that provided the data.
Types of Consumer Credit
Installment Credit vs. Revolving Credit
Installment credit is a fixed amount of credit made available to you to use once, typically for a specific purchase, like a home or a vehicle. Repayment periods and monthly payments are usually fixed for the life of the loan, but your monthly payments could vary if your loan has a variable rate.
Revolving credit provides a set amount of credit that you can borrow from repeatedly as long as you stick to the terms. You'll have the flexibility of using your credit freely while making minimum payments toward your outstanding balance.
Both installment and revolving credit may charge interest on balances that you repay over time. Each may also come with additional fees.
Secured vs. Unsecured
Secured credit requires you to provide an asset or assets as collateral to get the loan. If you default on the credit agreement, the lender can take your collateral and sell it to pay your balance. Mortgages, auto loans, and secured credit cards are examples of secured credit.
By comparison, unsecured credit is not tied to assets that the lender can seize in the event of a default. Unsecured credit, like credit cards and student loans, tends to have higher interest rates because lenders consider them a higher risk since there’s no collateral.
How To Get Consumer Credit
To get consumer credit, you'll apply with a lender or credit card issuer. The application will ask you for personal information to verify who you are and determine whether you can repay what you borrow. In most cases, the lender will also check your credit history to see whether you meet their credit requirements and to determine the interest rate and repayment terms they offer you.
Certain types of consumer credit are easier to get than others. Credit cards, for example, are relatively easy to apply for and render quick approval, sometimes within seconds.
Mortgages, by comparison, require extensive documentation, an underwriting process, and can take more than a month to process. In general, the more money you borrow, the harder it may be to qualify for the loan.
FAQs
What is Consumer Credit? A consumer credit system allows consumers to borrow money or incur debt, and to defer repayment of that money over time. Having credit enables consumers to buy goods or assets without having to pay for them in cash at the time of purchase.
What do you mean by consumer credit? ›
Consumer credit, or consumer debt, is personal debt taken on to purchase goods and services. Although any type of personal loan could be labeled consumer credit, the term is more often used to describe unsecured debt of smaller amounts.
What is customer credit? ›
Customer credit is a form of payment that allows small business customers to purchase a product or service before paying for it in full. The process works similarly to the way a credit card does—you procure something and pay it back later.
What does consumer credit cover? ›
The Consumer Credit Act (CCA) is a key piece of legislation that was introduced in 1974 to give consumers more protection. The CCA covers different types of credit agreements, including credit cards, personal loans and hire purchase.
What is an example of a consumer credit transaction? ›
Typical consumer credit transactions subject to TILA include store credit purchases, credit card agreements, installment loans, automobile financing plans, and some real property transactions secured by a consumer's principal dwelling place, such as mortgages, home equity or home improvements loans.
Is consumer credit a good thing? ›
Consumer credit is an important element of the United States economy. A consumer's ability to borrow money easily allows a well-managed economy to function more efficiently and stimulates economic growth.
What is the difference between a loan and a consumer credit? ›
While a loan provides all the money requested in one go at the time it is issued, in the case of a credit, the bank provides the customer with an amount of money, which can be used as required, using the entire amount borrowed, part of it or none at all.
Is consumer credit a debt? ›
Consumer debt consists of personal debts that are owed as a result of purchasing goods that are used for individual or household consumption. Credit card debt, student loans, auto loans, mortgages, and payday loans are all examples of consumer debt.
What is on a consumer credit report? ›
A credit report is a statement that has information about your credit activity and current credit situation such as loan paying history and the status of your credit accounts.
What is a consumer credit job? ›
Consumer Credit Analysts analyze credit data and financial statements of individuals or firms to determine the degree of risk involved in extending credit or lending money. Prepare reports with credit information for use in decisionmaking.
Consider the Sources of Consumer Credit
- Commercial Banks
- Savings and Loan Associations (S&Ls)
- Credit Unions (CUs)
- Consumer Finance Companies (CFCs)
- Sales Finance Companies (SFCs)
- Life Insurance Companies
- Pawnbrokers
- Loan Sharks
Some common types of consumer credit are installment credit, non-installment credit, revolving credit, and open credit.
Is consumer credit a personal loan? ›
Consumer credit can be in the form of a credit card or any type of personal loan.
What is consumer credit payment? ›
Consumer credit, put simply, is the ability to pay for items with credit instead of cash, which usually means borrowing money and paying it back over a period of time. Credit cards, student loans and mortgages are all examples of consumer credit in action.
What is a real life example of consumer credit? ›
Consumer credit refers to the credit facility financial institutions provide to their customers for purchasing goods and services. Common examples are credit card payments, consumer durables loans, and student loans.
What are some examples of consumer credit information? ›
Consumer credit comes in two forms, revolving (or open-ended) and nonrevolving (or on an installment basis until the last payment is made), and either may be secured with collateral or without. Examples of consumer credit include credit cards, automobile loans, personal loans, and student loans.
What is one type of consumer credit? ›
Total consumer credit comprises two major types: revolving and nonrevolving. Revolving credit plans may be unsecured or secured by collateral and allow a consumer to borrow up to a prearranged limit and repay the debt in one or more installments.
What does consumer mean on credit report? ›
A Consumer Statement is an optional statement of up to 475 characters that you can add to your Equifax credit report. The Consumer Statement can be added to explain a disagreement with the outcome of a dispute investigation or provide additional information about items on your Equifax credit report.
What is consumer credit vs non consumer credit? ›
Consumer debt is a debt incurred by an individual for primarily personal, family, or household purposes. Anything else is non-consumer debt.
What does consumer credit data mean? ›
Your consumer credit report includes information to identify you such as your name, date of birth, address and employer. It also includes certain information about how you've handled any past or current consumer loans or debts, and your repayment history.
