What is a 'Consumer Credit'

Consumer credit is a debt that a person incurs when purchasing a good or service. Consumer credit includes purchases obtained with credit cards, lines of credit and some loans. Consumer credit is also known as consumer debt. Consumer credit is divided into two classifications: revolving credit and installment credit. The most common form of consumer credit is a credit card.

BREAKING DOWN 'Consumer Credit'

Economists and other financial analysts frequently measure consumer credit, which serves as an indicator of economic growth. For example, if consumers can easily borrow money and repay those debts on time, then the economy is stimulated resulting in economic growth.

Consumer credit is the portion of credit consumers use to buy non-investment services consumed or goods that depreciate quickly. This includes automobiles, education costs, recreational vehicles (RVs), boat and trailer loans, but it does not include debts obtained to purchase margin on investment accounts or real estate. For example, a mortgage loan is not consumer credit. However, the 65-inch high-definition television charged on a credit card is consumer credit.

Consumer credit allows consumers to get an advance or loan to spend money on products or services for family, household or personal uses repaid at a specified future date. Retailers, department stores, banks and other financial institutions offer consumer credit.

Advantages of Consumer Credit

The main advantage of consumer credit is that consumers can purchase goods and services and pay for them later. Consumers can purchase items they need when their funds are low. Consumer credit offers a backup form of payment and one monthly payment.

Disadvantages of Consumer Credit

The main disadvantage of using consumer credit is the cost. If a consumer fails to repay a loan or a credit card balance, this impacts his credit scores, affects terms and conditions, and results in late fees and penalties.

Types of Consumer Credit

Installment credit is used for a specific purpose, for a defined amount and for a specific period. Payments are usually the same amount each month. Examples of purchases made on installment credit include large appliances, automobiles and furniture. These kinds of loans usually offer lower interest rates than revolving credit. For example, a car company holds a lien on the car until the car loan is repaid. The total amount of the principal and interest is repaid within a predefined period. If the customer defaults on the loan payments, the company can repossess the car and charge penalties.

Revolving credit can be utilized for any purpose. Loans are made on a continuous basis for purchases until the consumer reaches his credit limit. Customers receive bills periodically to make at least a minimum monthly payment. For example, Visa can approve a consumer for a $5,000 credit card limit with a 13% interest rate. If the consumer defaults on payments, the credit card company can charge late fees or other penalties.

RELATED TERMS
  1. Credit History

    A record of a consumer's ability to repay debts and demonstrated ...
  2. Minimum Monthly Payment

    The smallest amount of a credit card bill that a consumer can ...
  3. Credit Mix

    The types of accounts that make up a consumer’s credit report. ...
  4. Credit Limit

    The amount of credit that a financial institution extends to ...
  5. Credit Rating

    An assessment of the creditworthiness of a borrower in general ...
  6. Credit Utilization Ratio

    An input used in determining a person's credit score. It is the ...
Related Articles
  1. Investing

    Investing In Credit Card Companies

    This investment requires keeping an eye on consumer indexes and the overall health of the economy.
  2. Personal Finance

    6 Ways To Build Credit Without A Credit Card

    It's definitely possible – if a bit more complicated – to build a credit history without traditional credit cards. Just follow these steps.
  3. Personal Finance

    The Basics Of Lines Of Credit

    Lines of credit are potentially useful hybrids of credit cards and normal loans. Learn how a line of credit can help (and hurt) your finances, and how to find the best one to suit your needs. ...
  4. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  5. Personal Finance

    Use Your Credit Card To Boost Your Credit Score

    Misusing credit cards can blow your credit – but using them well can boost your score. How to grow a history, fix bad credit, make good credit even better.
  6. Personal Finance

    How To Establish A Credit History

    Can't get a credit card without a credit history, and can't get a history without a card? Break the Catch-22.
  7. Personal Finance

    The History Of Consumer Credit Rights

    The Fair Credit Billing Act of 1974 gave consumers the power to dispute credit card charges.
  8. Personal Finance

    The Importance Of Your Credit Rating

    A great starting point for learning what a credit score is, how it is calculated and why it is so important.
  9. Investing

    Revolving Credit vs. Line of Credit

    Revolving credit and a line of credit are arrangements made between a lending institution and a business or individual.
  10. Investing

    10 Ways To Improve Your Credit Report

    A good credit rating can make your life simpler in almost every way. Here's how to build up yours – and repair it if times get tough.
RELATED FAQS
  1. What is the difference between a loan and a line of credit?

    Learn to differentiate between lines of credit and standard loans, and determine when you are likely to use each method of ... Read Answer >>
  2. What is the difference between bad credit and no credit?

    The answer to this question will depend on what information (if any) is found on your credit report, such as any bankruptcy ... Read Answer >>
  3. What are some good alternatives to taking out a line of credit?

    Read more about how opening a line of credit might not be the best answer for you and determine available alternatives if ... Read Answer >>
  4. Is it possible to have a credit limit that's too high?

    Avoid these pitfalls when working with high credit limits, and learn how to increase your credit score by increasing your ... Read Answer >>
  5. What is the difference between "closed end credit" and a "line of credit?"

    Find out about the difference between closed-end credit and lines of credit, and how both closed- and open-end credit is ... Read Answer >>
  6. How will accepting a higher credit card limit affect my credit score?

    Find out if accepting a higher limit on a credit card impacts credit score and how that impact affects one's overall credit ... Read Answer >>
Trading Center