Consumer Credit

What Is Consumer Credit?

Consumer credit is borrowing by individuals for everyday personal or household needs. It includes the money people owe on credit cards, auto loans, personal loans, and similar products. It usually excludes loans secured by real estate, such as mortgages, and loans taken out for business purposes. Economists and central banks track consumer credit closely because it shows how much households are borrowing and spending.

How Consumer Credit Works

Consumer credit is commonly divided into two groups. Revolving credit has no fixed end date and no fixed number of payments. A borrower can repeatedly use a credit limit, repay the balance, and borrow again, as with a credit card or a store card.

Installment credit is repaid on a set schedule of equal payments over a fixed term. Auto loans and most personal loans work this way. Interest is charged on the outstanding balance, and the total cost depends on the annual percentage rate (APR) and the length of the loan.

In the United States, the Federal Reserve publishes a monthly estimate of consumer credit outstanding. Lenders must also disclose key loan terms under federal law, including the Truth in Lending Act.

Why It Matters to Investors

Consumer credit trends offer clues about household finances and the broader economy. Rising balances can signal strong demand and confidence, but they can also point to growing household debt, which may limit future spending if incomes do not keep pace. Lenders, including banks and consumer finance companies, often report on loan quality. A rising delinquency rate can signal stress in a lender's loan book and may affect its earnings.

Advantages and Drawbacks

Consumer credit lets people buy goods and cover expenses before they have saved the full amount. The main drawback is cost. Interest and fees can add significantly to the total paid, and missed payments can lower a borrower's credit score.