Credit Cards

Consumer Credit: Giving People Access To The Money They Need

Consumer credit is the money that a consumer has borrowed from a business, a bank, or any type of financial institution to purchase goods or services. The money consumers borrow using their credit can be repaid over time. The amount of consumer credit one has is determined by ones borrowing history, their proven ability to repay over time or their collateral. Two common types of consumer credit: secured and unsecured. Secured credit is when the person has collateral to guarantee the loan will be repaid. However, unsecured credit is granted when the person has proof of income and a good credit score.

The Value Of Consumer Credit

For any country, consumer credit is can be a very important element because it can help the economy to thrive. When residents have a high degree of consumer credit, and it is well managed, it stimulates economic growth and enables the economy to be able function more efficiently. Consumer credit enables people to get the money they need to buy the things they want. Consumer credit is very important because it has a positive effect on your ability to get jobs, housing, loans, insurance, and more. Some areas where having good consumer credit is important include:

  1. Credit cards
  2. Auto Loans
  3. Mortgages
  4. Student Loans

Laws Governing Consumer Credit

There are both federal and state laws that are designed to govern consumer credit and protect consumers to ensure they are not victims of unfair lending practices. Plus, those laws also prevent businesses from using non-financial factors to discriminate
against consumers. Economists regularly monitor periodic fluctuations in consumer credit as well as the amount of consumer credit that is outstanding to figure out the economy’s health. For example, the preliminary data that the economist have gathered showed that consumers in the U.S. had outstanding unpaid consumer credit of $4.2 trillion as of March 2021.

Installment And Revolving Credit

Two other types of consumer credit are installment credit and revolving credit. Installment credit is when consumers are given access to a set amount of credit they can use once. That credit is usually given for a specific purpose. This can be things like a car or a home. When consumers get installment credit, they are given a repayment period along with fixed monthly payments until they have paid off the loan. If it is a variable rate loan, the monthly payments could vary. When a consumer has revolving credit, it provides them with a specific amount of credit they can use from time after time as long as they adhere to the repayment terms.

Secured Credit And Unsecured Credit

Two other common types of consumer credit are secured credit and unsecured credit. If a consumer has one or more assets to serve as collateral, they can qualify for secured credit loans. Should the consumer default on the loan, the lender can then seize the collateral, sell it and use the money to pay off the loan. Some examples of secured credit include secured credit cards, mortgages and auto loans. People who have good credit scores can qualify for unsecured credit. Although this type of consumer credit does not require collateral, the lender tends to charge higher interest rates because of the higher risk.

Getting Consumer Credit

In order for people to get consumer credit, they have to apply to a credit card issuer or with a lender like a financial institution. The person will then have to provide the lender with some personal information in order to verify the identity of the borrower and to determine whether they earn enough to repay the amount of money they want to borrow. Usually, the lender will check the applicant’s credit history to determine if they meet the lender’s credit requirements. The lender also uses the information on the credit application and the applicant’s credit history to determine the repayment terms and the interest rate they will charge.

Which Type Of Consumer Credit Is Easiest To Get

Not all types of consumer credit are easy to get. It is easier to get some kinds of consumer credit than others. For example, millions of people find it to be relatively easy to get credit cards. The application process is relatively easy, and the approval process can be as fast as just a few minutes. Credit cards issued by financial institutions is considered as the most commonly used form of consumer credit. On the other hand, getting the consumer credit required to get a mortgage is a very complex process that can take months to get approved. That’s because the credit applicant has to provide extensive documentation and the application must go through an underwriting process.

How Consumer Credit Benefits Consumers And Businesses

Banks, businesses, and credit card issuers give consumers credit through credit cards, loans and other means. These credit products enable consumers to be able to get the products and services they want, and need gives them the flexibility to be able to pay for them in installments over time. The consumer typically pays the bills using monthly payments. The consumer is able to buy more because the monthly payments are much smaller than the total price of the items they buy. The businesses and financial institutions that extend credit to the consumers make money by charging the consumer interest on the money they borrow.

Determining Credit Worthiness

Before businesses, banks and other financial institutions will extend consumer credit to a person who applies for it, they must first determine their credit worthiness. The most common way they do this is by checking their credit report through one or more of the large credit reporting agencies. Those agencies keep a record of people’s payment history. A person’s credit history shows if the regularly pay their bills on time or if they have a record of late payments. By compiling that information and giving each consumer a credit score, the credit reporting system enables credit card companies, businesses and financial institutions to easily determine a person’s creditworthiness.