What Does Consumer Credit Mean?

Consumer credit includes various types of short-term loans used by individuals for product and service purchases for personal, family or household use or consumption. By definition, consumer credit is not used for purchases of resale products or for investment in business activities. These fit within the definition of commercial credit.

Consumer Loans

Several types of short-term loans are available to and used by consumers. Credit cards are a simple and common example of consumer credit. Credit cards offer revolving credit lines with stated credit limits and monthly payment obligations. Student loans are another example of consumer credit. Virtually any consumer loan product with a balance below $25,000 likely classifies as consumer credit, as defined by the State of Wisconsin Department of Financial Institutions (DFI).

Accounts Receivable

Accounts receivable is commonly used with business trade customers, but many companies also offer direct credit opportunities for consumers. Accounts receivables is a common accounting terms that includes items purchased and not paid for when current month balances are forwarded to the next. These are essentially unsecured agreements between a provider and a customer. Rather than causing customers to obtain external loans, some companies allow long-term customers or those with good credit the ability to buy and pay the balance, with interest, over time.

Detached Second Mortgages

First mortgages and first and second mortgages combined with the same lender are not typically considered consumer credit. However, second mortgages held by a different lender than a homeowner's first mortgage typically are consumer credit, according to the State of Wisconsin DFI definition. Unlike unsecured accounts receivables, second mortgages held separately from first mortgages are secured by property as collateral. This makes the loan less risky for the lender as they have a possible claim against your property.

Overdraft Protection Programs

An additional example of a consumer credit transaction outlined by the State of Wisconsin DFI occurs when a bank offers checking account customers overdraft protection through a credit account. This means that if you mistakenly make a payment from your checking account and the balance does not cover it, your overdraft protection kicks in. Depending on the setup of the overdraft protection, you would pay the overdraft amount by adding new funds into your checking account or directly paying off the overdraft amount.