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7 September 2021

When it comes to finance, I think we can all agree that it may seem a little daunting at first… with so many options and fancy words. People often wonder why we never learnt this important matter at school and why the education system deems geometric functions to be a superior learning curve for students- pardon the pun.

In this useful guide, we will be unravelling the ins and outs of consumer credit to ensure that we are financially safe and stable moving forward.

Consumer credit is defined as personalised debt taken on to purchase goods and services; it is extended by banks, retailers and others to enable consumers to purchase goods immediately and pay off the cost over time with interest. Simple! This can be split into two main categories: instalment credit and revolving credit.

Instalment credit is used for a specific purpose and is issued at a defined amount for a set period of time. Payments are most commonly paid monthly in equal instalments and are utilised for big-ticket purchases. This makes it easier as the payment becomes routinely with the same price each time. Instalment credit is advantageous as it usually offers a lower interest rate, in comparison to revolving credit, as an incentive to the customer. You cannot complain about that. The item purchased serves as collateral in the danger of consumer default.

Alternatively, revolving credit is used for any purchase and often comes in the form of a credit card. The name ‘revolving’ derives from the idea that the line of credit remains open and can be used up to the maximum limit repeatedly- as long as the borrower keeps paying a minimum monthly payment on time. Shoppers can spend away as long as you are confident they can pay back on time.

Revolving credit is different to instalment as it may never be paid off in full; the consumer pays the minimum and allows the remaining debt to accumulate interest from month to month. This type of credit is available at a relatively high interest rate because it is not secured by collateral. It is important that the negatives are made as clear as the positives; the consumer is entitled the right to a fair communication before signing up to a financial deal.

Consumer credit takes into account the portion of a family or individual’s spending that goes towards goods and services that depreciate quickly. This includes necessities such as food, as well as discretionary purchases.

From month to month, consumer credit is closely measured by economists because it is considered an indicator of economic growth or contraction. This is inferred through a process where if consumers are willing to borrow and are confident they can pay back on time, the economy will boost. However, it can also be analysed that if consumers cut back on their spending, thus indicating concerns about their financial stability, the economy will contract. So, let this push us to keep on top of our payments to boost our economy!

Consumer credit can be very advantageous to those who require it: one reason being that it allows consumers to get an advance on income to buy products and services. Also, seen as though credit cards are relatively safe to carry, we are now entering a cashless society, thus increasing the importance of consumer credit. Revolving consumer credit is a highly lucrative industry- banks and financial institutions, department stores and many other businesses offer consumer credit.

Contrastingly, the main disadvantage of revolving credit is the cost to customers who fail to pay off their entire balances each month, thus continuing to result in additional interest charges. This is another reason to always aim to stay on top of payments.

In order to prevent this from happening, the FCA promotes fair and clear communication between your firm and the customer. By upholding these principles, you can reduce the risk of your customers getting into financial difficulties:

  • Products and services your market and sell should meet the needs of your customers and be targeted accordingly
  • Keep customers well informed before, during and after sales
  • Advice must be suitable and take into account your customer’s circumstances

By keeping the customer at the heart of your business, you will ensure your products are tailored to their needs. Fostering a positive culture in your firm can help support providing you customers with suitable products that offer them a positive credit experience.

Whether you have learnt one new fact or ten, by breaking consumer credit down to it’s basics, we can tackle the confusing (and sometimes admittedly tedious) topic of finance to ensure that we all understand the offers that credit provides.

If you require additional assistance in consumer credit, please do not hesitate to contact us on info@thecompliancecompany.co.uk

By Ian Beardmore

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