Also referred to as “consumer debt,” consumer credit is reported by the U.S. Federal Reserve and is a debt that someone incurs for the purpose of purchasing a good or service. This includes purchases made on credit cards, lines of credit and some loans.
Consumer credit is basically the amount of credit used by consumers to purchase non-investment goods or services that are consumed and whose value depreciates quickly. This includes automobiles, recreational vehicles (RVs), education, boat and trailer loans, but excludes debts taken out to purchase real estate or margin on investment accounts. For example, a mortgage for purchasing a house is not consumer credit. However, the new 60 inch television you put on your credit card is.
The debt is contracted for the purpose of increasing present consumption. This is the only kind of debt that most ordinary persons ever contract.
People go into debt for all kinds of things—to buy food or clothing; to have a place to live; to travel; to go to football or baseball games; to bet on the horses; to contribute to worthy causes; to pay doctor bills.
You may think that some of these things are good and that others are bad, but that isn’t the point. The important consideration for us is they are not going to help us directly to pay back the debt. Good health helps to pay the doctor bills, in a way, and a well-dressed appearance may help to pay the tailor-particularly for a bond salesman. But by and large, debts of this kind have to be paid back out of wealth or income that has not been increased by the debt.
Consumer credit advances the time of consumption, but not its amount. Over a long period of time no one can possibly get more automobiles, radios, dinners, theaters, or clothes by going into debt for them. They may have more of these things this month or this year by going into debt, but they will have to get along with fewer of them next year.
Over time, part of the debtor’s income will have to go to pay the interest charges on their debt.
There are scenarios when taking on debt could be productive in the long-run. Someone who borrows to put themselves through medical school almost certainly increases their ability to earn and pay off the debt.
Alternatively, an individual who loves the piano might buy one on the installment plan, fully aware that the monthly payments will cut into their future purchasing power, but willing to make that sacrifice for the enjoyment they will get out of the instrument. For a music teacher, however, a debt of that kind would not be for consumption, but for production.
Consumer credit, although it cannot in the long run increase the total amount of goods sold, does have an important effect on what is sold. That is because consumer credit is more readily advanced for certain kinds of goods than for others.