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Consumer credit is a money term you need to understand. Here’s what it means.
What is consumer credit?
Consumer credit, also called consumer debt, is credit extended to individuals to buy goods or services. Most commonly associated with credit cards, consumer credit also includes other lines of credit, including some loans.
There are two types of consumer credit: revolving credit and installment credit. With revolving credit, the person is approved for a specified amount of credit and can use it whenever he or she needs it, as with a credit card.
With installment credit, the person pays a specified number of payments of a fixed amount until the loan is paid off.
Consumer credit typically covers to material goods, usually items that depreciate quickly, such as vehicles or electronics such as televisions. It excludes investment purchases such as stocks, bonds, or real estate and similar property.
A home loan would not be considered consumer credit because buying real estate is considered an investment and the property purchased would be considered an asset.
There are usually fees associated with using consumer credit, whether it’s an installment or revolving account. In either case, the person usually pays interest if they carry a balance, as well as late fees if they don’t make their payments on time.
Consumers also typically are required to pay a minimum amount each month toward their balance. With installment credit, they also may face having the item repossessed if they don’t make their payments as well as penalty fees for not paying the agreed-upon amount.
Want to know how long it will take to pay off your credit card balance? Use this calculator to find out.
Consumer credit example
If you have a credit card, this is considered consumer credit because you use it to purchase services and material goods instead of investment products such as real estate or stocks.
You have a predetermined amount you’re allowed to spend, and you can use it for everything from dining out to home furnishings, electronics or other material goods. If you have a line of credit with a specific store, this is also considered consumer credit because it works in much the same way.
Are you looking for better ways to manage credit card spending? Here are seven strategies to get out of debt once and for all.
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