What Is Consumer Credit?

Consumer credit is prevalent throughout today's economy, and consumers regularly use consumer credit as part of their daily purchasing habits. But what exactly is consumer credit, and what are its advantages and disadvantages for the consumer?

Consumer Credit Definition

Consumer credit is loosely defined as goods, services, privileges or money given to an individual instead of direct payment. Typically consumer credit is extended to an individual with additional interest owed beyond the borrowed or deferred payment amount.

Consumer Credit Types

Several common types of consumer credit include credit cards, retail store cards, motorized vehicle financing, personal installment loans and some retail installment or rent-to-own loans. Home mortgages are not typically considered to be strictly consumer credit because of the specific nature and regulation of the mortgage lending industry.

Function of Consumer Credit

Consumer credit functions to allow consumers to defer payment for purchases and repay with interest at a consistent and sometimes fixed rate. Many consumers use consumer credit to purchase higher priced goods and services like vehicles, home appliances, and home or auto repairs. Because consumers may not be able to readily access the cash required to buy these items outright, consumer credit allows the convenience of deferred payment. It is also common for many retail and impulse purchases.

Consumer Credit Advantages

Consumer credit enables consumers to use products and services while they are still paying for them without waiting until they've saved enough money for an outright purchase. Consumer credit types like credit cards and retail cards allow consumers to make purchases easily online. Successfully paying back consumer credit can build a favorable credit record, allowing consumers to take advantage of other investment or borrowing opportunities.

Consumer Credit Disadvantages

One disadvantage of utilizing consumer credit is that it reduces the tendency for saving money, which can leave families vulnerable if financial emergencies arise. In addition, because consumer credit options like credit cards are easy to use but involve relatively high interest rates, it is easy for consumer credit levels to get out of the consumer's control. A damaged credit rating from unpaid consumer credit can adversely affect a consumer's ability to obtain other personal or business financing.