Consumer Credit Basics

consumer credit basics to manage your financial life

Your personal situation is different from someone else. The consumer credit services that works for someone may not be the best choice for someone else. You should take the time to understand all the consumer credit basics to find the best solution for your needs and goals.

What Is Consumer Credit?


Consumer Credit is simply the ability for a consumer to be able to borrow money in order to purchase a product or service. Borrowed money can take many forms, such as credit cards for product purchases. a student loan, a personal loan, car loan or home mortgage.

Consumer Credit Basics


Consumer credit basics are straightforward.  When you receive credit from a creditor, for example from a bank, you are assuming debt. Debt is the other side of credit. You will need to pay back the full amount of this debt, interest and possible late fees depending upon the terms of the credit agreement.

Having access to credit means you can buy something before you pay for it. This ability to borrow gives you the flexibility in planning your purchases and makes it possible to pay for a large purchase over time. However, you also pay interest on the purchase amount, so use credit wisely, and only borrow money to make necessary purchases.[/vc_column_text]

Types Of Credit | View Of Lender

TYPES OF consumer credit

Today there are many different types of consumer credit that are available from a wide variety of sources. Some loan agreements specify equal monthly or annual payments, while others require a large single payment of both principal and interest. Some loans require nothing more than a borrower’s promise to pay.  Others require that the borrower pledge certain assets as collateral to guarantee repayment of the loan.

Consumer credit can be divided into two broad categories: installment credit and non-installment credit.

INSTALLMENT CREDIt

Installment Credit or closed-end credit, are loans that require you to repay the principal amount in equal periodic payments, usually monthly. An automobile loan is an example of installment credit.  Installment credit is also a popular method of financing expensive items like appliances and electronics. The lender will ordinarily retain the title to the property until the loan is paid completely.  If not paid off, the property is repossessed.

NON-INSTALLMENT CREDiT

Non-installment Credit, is comprised of single-payment loans and loans that permit the borrower to make irregular payments and to borrow additional funds without submitting a new credit application. This latter type of loan is also known as revolving or open-end credit.

Single-payment loans (or term loans) require the repayment on a specified date of the entire amount that was borrowed plus interest charges.

Open-end credit allows the borrower to draw out additional funds as they’re needed, so long as the total outstanding loan balance doesn’t exceed a predetermined limit, known as the credit limit or line of credit. Charge accounts (Sears and J.C. Penny) and credit card accounts (MasterCard and Visa) are the most common examples of open-end credit.

These types of accounts permit a continuous source of credit. The borrower reduces the debt by making payments and can also add to it by borrowing, or charging, addition amounts without having to reapply for credit. Generally, open-end credit accounts allow irregular or partial payments to be made subject to a predetermined periodic minimum amount established by the lender.

how a lender looks at you

All lenders have a responsibility to determine the amount of financial risk associated with extending credit to a borrower.  The lender, of course, expects and needs to be paid back the credit extended (the loan) in the time-frame agreed to by the borrower.

The lender takes into consideration the type of loan,  secured with property (a car loan) or unsecured (a credit card) as part of determining the financial risk of the loan. If the loan is secured with property, there is less risk to the lender.  When it is an unsecured loan, the lender will place more emphasis in evaluating you, the borrower.

The lender evaluates you based on the Three C’s of Credit – Character, Capital and Capacity in making a decision about whether to take you on as a borrower:

Character – From your credit history, the lender attempts to determine if you possess the honesty and reliability to repay the debt.

  • Have you used credit before?
  • Do you pay your bills on time?
  • Do you have a good credit report?
  • Can you provide character references?
  • How long at your current address?
  • What type and how long at your present job?

Capital – The lender will want to know if you have any valuable assets such as real estate, personal property like an automobile, or savings and investments that could be used to repay unsecured credit debts if income is unavailable.

  • What property do you own to secure the loan?
  • Do you have a savings account?
  • Have you investments to use as collateral?

Capacity – This refers to your ability to repay the debt. The lender will look to see if you have been working regularly in an occupation that is likely to provide enough income to support your credit use.

  • Do you have a steady job?  If so, what is your salary?
  • How many other loan payments do you have?
  • What are your current living expenses?

Federal Reserve G.19 Rel - US Consumer Debt 2018

Auto Loans 1113Billions
Student Loans 1524Billions
Revolving Debt 1039Billions
Total Consumer Debt 3698Billions

How Is My Credit Worthiness Determined?


Your financial life is defined by the contents in your credit reports that are generated by the national credit bureaus.  Whenever you have requested credit from a lender, for whatever reason, that is noted in your credit reports.  Each payment or non-payment that you have made to a creditor is recorded in your credit reports.  All of these credit activities are retained in your credit reports for a period of seven to ten years before rolling off.  In the eyes of a potential lender, your credit report defines you.

The information in your credit reports are numerically analyzed by the credit scoring companies.  Based on their financial models they assign you a credit score that is used by a lender as a predictor of consistent, on time repayment of credit debt.    The financial models that the credit scoring companies use do not take into consider any personal information of the debtor.  In that sense your credit score is completely impersonal.  Right or wrong, good or bad,  your credit score determines your credit worthiness. 

Credit Report | Credit Score

consumer credit report

There are three major US credit bureaus: Experian, TransUnion and Equifax. The credit bureaus maintain records of your credit data and other identifying information. These are your consumer credit reports.

When you get a new loan or credit card, make or miss a payment, apply for a car loan, etc., your lenders will report this information to the credit bureaus. Since it is up to your lenders what information they report to the credit bureaus, and which credit bureaus they report to, it is not uncommon for your credit reports to be slightly different at each bureau.

Credit report information

All consumer credit reports contain the same four categories of information.

Personal Information – Your name, address, Social Security number, date of birth and employment information. This information is NOT used in calculating your credit score.

Accounts – Your credit accounts, organized by type (bankcard, auto loan, mortgage, etc.), date opened, credit limit or loan amount, account balance and payment history.

Inquiries – Requests for your credit report within the last two years. There are two types of inquiries:  hard inquiries and soft inquiries.   A hard inquiry occurs when a lender or other third party checks your credit report or score when you apply for credit with them.  A soft inquiry typically occurs when your credit reports and scores are pulled without you applying for credit (like when a credit card issuer sends you a pre-approved offer), or when you pull your own credit reports. Your credit scores only consider hard inquiries.

Negative Items – Delinquency information from missed payments that have been reported by lenders.  This also includes information on overdue debt from collections agencies, and public record information (bankruptcies and foreclosures).

consumer credit score

Consumer credit scores are based on the information in our major credit reports. They represent a numerical weighting of different categories found in a credit report. There are two major providers of credit score reports in the US: FICO Score and VantageScore. While the credit scores may be calculated a bit differently, they will likely produce very similar results for you.

A credit score is a statistical summary of the information contained in a consumer’s credit report usually graded on a scale ranging from 300 to 850. Your credit score represents your financial reputation. It is used by lenders, landlords, employers and others to determine your level of credit risk, responsibility, and overall character.

Credit scores are calculated using information in your credit reports, including your payment history, the amount of debt you have, and the length of your credit history. Higher scores mean you have demonstrated responsible credit behavior in the past, which may make potential lenders and creditors more confident when evaluating a request for credit, like a loan or a credit card.

Here is a general look at credit score ranges:

  • Excellent – 800-850
  • Very good – 740-799
  • Good – 670-739
  • Fair – 580-669
  • Poor – 300-579

Credit scores may vary according to the scoring model used and which credit bureau furnishes the credit report used for the data. That is because not all creditors report to all three three nationwide credit bureaus. Some may report to only two, one or none at all. Also, lenders may also use a blended credit score from the three major credit bureaus.

The types of credit scores used by lenders and creditors may vary based on their industry. For example, an auto lender might use a credit score that places more emphasis on your payment history when it comes to auto loans.

Since everyone’s financial and credit situation is different, lenders may also have different criteria when it comes to granting credit, for example, including your income as a factor.

Consumer Credit Basics Review


Americans are living beyond their means. The average American household carries $137,063 in debt, according to the Federal Reserve’s latest numbers. Yet the U.S. Census Bureau reports that the median household income was just $59,039 last year.  That means many Americans are living beyond their means.

There are good and bad uses of credit.  Consumers primarily have a problem managing their credit card debt.  Good use of your credit cards should be for their convenience, ease of use, and relative safety.  Bad use of your credit cards is if you are using them to make everyday purchases that you cannot afford to pay in cash.  Then you are on the verge of debt trouble.

One of the principal consumer credit basics is that you need to live within your means.   Use credit responsibly.  Don’t be a debt statistic.

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