What types of consumer credit are available?

consumer credit credit problems

What types of consumer credit are available?

There at least three basic types of consumer credit:

Noninstallment credit is the simplest form of credit and is usually for a very short term, such as 30 days. The buyer makes one payment at or before the end of the credit period. This kind of credit enables consumers to take possession of property immediately and pay for it within a short time. Many department stores offer noninstallment credit to their regular customers; this enables the store to make sales and get the money in the near future, thus generating better cash flow for the business than might otherwise occur.

Installment closed-end credit is another form, where only a specified amount of money is lent to the consumer, typically the total purchase price of the goods. This kind of credit is also used by department stores for the sale of large items and by auto dealers for the sale of automobiles. For example, if you purchase a sofa and chairs at a furniture store, the store might give you credit up to the full amount of the sale, which will be repaid with interest, but the store does not make further credit available to you under that agreement. The full amount of the principal and interest must be paid within a pre-determined time period. In this kind of credit the lender usually retains title to the purchased goods until all the payments have been made. If the purchaser defaults on payments, the seller can repossess the property.

Revolving open-end credit is found with most credit cards. In this kind of credit the lender extends credit for use by the consumer, with an outside limit that depends on the debtor’s credit history and ability to handle the debt repayment. The financial institution gives the debtor a credit card with a credit limit, such as $1,000, $5,000, or $10,000, and the debtor can choose how much of the available credit s/he will use at any given time. The debtor makes periodic (usually monthly) payments, and continues to use the available credit as needed, as long as each periodic payment meets pre-determined minimum amounts.

Revolving open-end credit requires active management by the debtor. The debtor can decide to pay off the entire outstanding debt when the statement is presented, pay off more than the required minimum payment (but not the entire amount), or simply make the minimum required payment. The debtor thus can determine how much credit will be available to him/her at any given time.

Other credit cards, like travel and entertainment accounts with American Express or Diners Club, may have an open ended amount of credit, but the card holder is expected to pay the balance off each time period, usually each month.

(Reviewed 10.31.2008)

Read more for related video clips.

YouTube responded with an error: The request cannot be completed because you have exceeded your <a href="/youtube/v3/getting-started#quota">quota</a>.