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How To Understand Consumer Credit

How To Understand Consumer Credit

Understanding consumer credit is the basis of successfully navigating almost all aspects of society where finances are involved. This might sound like a general statement but in reality consumer credit will affect what car you drive, where you work, where you live and how you shop. This is because unless you happen to be part of the lucky 1% of individuals with unlimited wealth who can pay cash for everything at some point you will need to get a loan. Financing through loans is the basis of all consumer credit.

The main aspect of consumer credit which most people are aware of is credit cards. Almost everyone has a credit card and most recognize its importance in day-to-day life. It is the foundation of a consumer driven economy and without credit cards rapid growth and high standards of living would not be possible. Credit cards are technically short-term revolving lines of credit. They are used to temporarily purchase goods or services with a short repayment window at a nominal interest rate.

Credit card however are only one form of consumer credit. Mortgages and automobile loans are another version which have longer terms and lower interest rates to allow the purchase of more expensive items. Riskier forms of consumer credit include payday and title loans which require collateral and often have onerous terms with exorbitant interest rates. Any financial tool which allows a consumer to delay payment for a given period of time coupled with an interest charge is considered consumer credit.

All of these various forms of consumer credit are summarized in an individual's credit report and is known as a credit history. The three major credit reporting bureaus are Experian, Equifax and TransUnion, and federal law requires them to provide one free credit report every 12 months. You can get your free credit report at www.annualcreditreport.com but additional features such as a FICO score often come with a nominal fee. This is important to know because all forms of consumer credit are tracked extensively and tied to the individual consumer.

It can be next to impossible to function in society without access to consumer credit. Employers and landlords often review a person's credit report prior to extending a job offer or lease. Most consumers don't have $150,000 to pay cash for a home which means they will require a mortgage. While cash is accepted at all retail locations, it can be inconvenient to constantly have to withdraw money at an ATM. Ask anyone who has made financial mistakes and has black marks on their credit report how it's affected their lives. You might be surprised how limited they are in what they can do without access to consumer credit.

Financial responsibility, which is not emphasized nearly enough in high school and college, is as important as physical health. Using consumer credit wisely conveys significant financial advantages over those who are more reckless in their decision-making. Unfortunately, many consumers incur debt early in life and don't find out until later how significant the negative impact is on their lives. Use good judgment and be judicious when using consumer credit and you will benefit from more financial opportunities and lower interest rates which saves money and makes you more financially independent.

Image by: Ian Britton