It is an expected part of modern life that consumers may need to rely upon outside credit sources to fund their purchases. While most day-to-day purchases can be funded through the income gained from employment, larger-scale purchases may not be able to be afforded immediately. For example, the purchase of a new car is often completed by taking on a car loan. In America, it is estimated that 85% of all new car purchases take place with the use of consumer credit. Other circumstances, such as the purchase of a new home, will often require a large amount of credit to be taken out via a mortgage. Put simply, consumer credit is a vital part of modern living for millions of consumers as it allows them to make larger-scale purchases without the need for having the complete funds themselves. In this article, three specific types of consumer credit are discussed.
Credit cards are one of the most popular forms of consumer credit. It is estimated that around 83% of Americans own at least one credit card, which they use to fund a wide range of common purchases. Credit cards work by offering the consumer a facility to buy goods and services up to an agreed credit limit. The consumer will then pay back an agreed amount of this credit every month and an agreed amount of interest on all purchases. The interest rates charged by credit card companies vary based on personal circumstances and the financial product itself. Generally, these are in the region of between 12% and 20% APR. If a consumer has a high credit rating, they may be able to enjoy the benefits of a credit card with a lower rate of APR. Conversely, consumers with poor credit histories or low credit scores may be refused a credit card or may have to pay higher interest rates.
Line of credit loans
A line of credit loan operates in a broadly similar way to that of a credit card. However, the key difference is that it allows the consumer to access a much higher credit limit. Most line-of-credit loan providers will allow the consumer to access credit up to $100,000, but other providers may allow higher levels of credit. A consumer often uses lines of credit for expenses that do not have a known final value but involve significant sums of money. They can also be used to consolidate other debts that may have been accrued. A high credit score is often a key requirement for getting this type of loan; minimum scores need around 670.
Most adults will hold some form of bank account to store their income from employment and fund expenditures. Bank accounts are commonly used to set up direct debits to pay for recurring bills automatically. Many bank accounts offer an overdraft facility. These lines of credit allow the account holder to go above their level of funds in their account up to a pre-expressed overdraft limit. This can be beneficial if larger payments need to be made at a time of low account funds (such as before payday). Many banks offer interest-free overdraft facilities, making them an extremely attractive proposition as the account holder will not incur debt when going into their overdraft.