What Is Consumer Credit?

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.

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.

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.