What is consumer credit?

Definition and Examples of Consumer Credit

How Consumer Credit Works

Types of Consumer Credit

How to Obtain Consumer Credit

Definition and Examples of Consumer Credit

Consumer credit is money that is borrowed by consumers from banks, financial institutions, or other companies to purchase goods and services. Access to credit allows consumers to make purchases today and then pay for them over time. Banks, financial institutions, and companies provide credit to consumers.

Examples of consumer credit include:

• Credit cards
• Student loans
• Mortgages
• Car loans

Federal and state laws regulate consumer credit to protect consumers from unfair lending practices and to prevent companies from discriminating against them based on non-financial factors.

How Consumer Credit Works

Banks, credit card companies, and some other businesses offer credit to consumers through products such as credit cards and loans. These credit products provide consumers with the flexibility to pay for purchases over time, typically with monthly payments that are much lower than the purchase price. In return, consumers pay interest to the lender.

The credit reporting system allows creditors and lenders to determine which consumers are the best borrowers. Banks and credit card companies track consumer borrowing and debt repayment. They regularly share this information with credit reporting agencies, which compile all consumer credit information into a credit report. Credit reporting agencies make consumer credit data available to prospective lenders so that they can assess the creditworthiness of potential borrowers.

Having a history of on-time debt repayment enables you to build a good credit history and therefore allows you to borrow more money on better terms.

On the other hand, poor credit management makes it difficult to obtain borrowed money, as banks may not be willing to extend credit to you. Those companies willing to lend to consumers with poor credit histories tend to charge higher interest rates and fees.

You have the right to view your credit information and dispute any errors with credit reporting agencies or the companies that provided the information.

Types of Consumer Credit

Installment credit vs. revolving credit

Secured credit vs. unsecured credit

How to Obtain Consumer Credit

To obtain consumer credit, you will apply with a lender or credit card issuer. The application will ask you to provide personal information to verify your identity and assess whether you can repay the borrowed amount. In most cases, the lender will also check your credit history to see if you meet their credit requirements and to determine the interest rate and repayment terms they offer you.

Some types of consumer credit are easier to obtain than others. For example, credit cards are easy to apply for and are often approved quickly, sometimes within seconds.

On the other hand, mortgages require extensive documentation and underwriting processes, which can take more than a month to process. Generally, the more money you borrow, the more difficult it is to qualify for the loan.

Source: https://www.thebalancemoney.com/what-is-consumer-credit-5188270