A consumer finance account is a very broad term, generally used when someone wishes to purchase items that they may not have the money in their bank account to afford upfront. This may be a new car, an item from an expensive furniture store, or even just money to pay rent or utility bills. In fact, almost all loans fall under consumer finance loans, from traditional loans to payday loans, with the exception of business loans.
The consumer finance loans that you take out with a consumer finance company – and then pay off – make up your credit history and form your credit report. This can help you apply for more consumer finance in the future, potentially at a less high-interest rate or generally more favorable terms as you are not seen as a high-risk customer.
However, in general, the term Consumer Finance Account is used to describe short-term loans with a high-interest rate.
What is a Consumer finance account?
A consumer finance account is an account held with a consumer finance company. These finance companies will normally structure a loan based on monthly payments.
Many consumer finance loans are made with a specific purchase in mind and are often available at the point of purchase. If a product is advertised as a certain number of dollars per month, this will be a consumer finance loan, and you will have to undertake the loan agreement in order to receive the offer.
Due to the interest rate on these loans, this always works out more expensive than buying the item outright. While this can be a useful way to purchase items that you need but cannot afford with what is in your bank accounts, it is necessary to run the sums and work out exactly how much it will cost you. Often consumer finance companies will not disclose the full amount, instead, they advertise the installments you will be paying in.
What is a consumer finance company?
A consumer finance company is any company whose main business is providing consumer finance accounts. Unlike the UK where these are governed by the National Consumer Credit Act, these consumer finance companies operate under state law for small loans and are classified as a consumer finance company by the three credit bureaus. Unfortunately, these classifications are confidential and not a matter of public record.
Although the credit bureaus won’t tell you, you can work out if you have a consumer finance company account by looking at the other services they offer. A consumer finance company will not, for example, be able to offer bank accounts.
In general, it is better to stick with more established financial companies such as banks and credit unions and avoid companies offering payday loans.
Other examples of companies that offer consumer finance accounts tend to be sub-divisions of other companies, and provide finance for specific products such as cars, or are linked with specific stores, such as store cards. While store cards tend to be able to be used in other stores, you will often find that you get rewards for shopping in the store associated with the store card.
What type of consumer finance accounts are there?
There are many types of consumer finance accounts, from loans from credit unions to consumer finance company loans. All of these build up your credit history. This can be a good thing as long as you manage it correctly, but too many consumer finance company loans or credit accounts in arrears can have a negative impact on your credit score.
Some common types of consumer finance accounts are below. This is not an exhaustive list, and all of them should be well-researched before you undertake the loan or line of credit. Make sure you can afford the repayments as missing payments will have a strong negative effect on your credit, which then becomes hard to rebuild as finance companies are less willing to loan money to people with a bad credit report.
Revolving accounts
Revolving accounts are the most common type of consumer finance loans. Credit cards fall under this category, although these are not always consumer finance company accounts as they can be provided by banks or credit unions.
People frequently use credit cards to buy things that they cannot necessarily afford upfront but will be able to soon. These loans are often interest-free as long as you pay them off each month. If you do not pay them off, however, they charge high-interest rates.
That said, having a credit card that has been paid off monthly for a number of years is a great way to improve your credit score. If you rarely approach the credit limit then this is even more beneficial and can help you slowly build your credit score.
As well as regular credit cards, this also covers store cards, although these tend to come with higher interest rates.
Auto Loans
Auto loans are a very common form of consumer finance account. They are taken out to buy a vehicle and often secured against the vehicle. In this case, if you default on the loan, then the company can reclaim the vehicle. Due to the low risk, these loans can have lower interest rates than some consumer loans and can be beneficial to your credit report.
These are mostly obtained through the dealership, and it is very important to read the terms and conditions as they can vary widely between dealerships. These are installment loans and you will be required to make monthly payments until you pay off the loan.
Payday loans
Payday loans are another, controversial, form of consumer finance account. They are short-term loans with exorbitant interest rates. Payday loans provide quick cash to people who need it, often to pay utility bills or other monthly expenses. Payday Lenders are renowned for taking advantage of people’s desperation, with high fees for late payments, increasing the likelihood that the consumer will need more money and take out more than one loan.
Unlike some other loans, these high-interest loans never look good on your credit report and will dramatically reduce your credit score.
Mortgages
Mortgages are the largest of the consumer finance loans. Generally, they are not thought of as consumer finance accounts as they are long-term loans and tend to have lower interest rates.
As these are such large undertakings, a mortgage company – often a bank or credit union – will require proof of the borrower’s income before loan approval is given. Once this has happened, you will be asked to sign a loan agreement that will set out the annual percentage rate and other conditions of the loan.
What are the advantages of consumer finance?
Consumer finance company accounts do have some advantages if you use them carefully.
- They can be used to improve your credit report
- They can provide quick cash when you require it.
- They can be used to spread the cost of large upfront payments.
- They can be a source of finance for people with a bad credit report.
What are the disadvantages of consumer finance?
While they have several benefits, there are also disadvantages to many consumer finance company accounts.
- The wrong consumer finance account can have a negative impact on your credit rating.
- They cost you more money than simply paying the amount upfront from savings.
- They can have steep late payments.
- Some have an interest rate so high that it is very difficult to clear your account.
Can consumer finance company accounts help my credit score?
Improving your credit report involves building a history of small loans and repayments over a number of years. Your credit report will help you get a credit line and potentially raise your credit limit as your credit report improves.
Credit scores, or FICO scores, have a symbiotic relationship with consumer financing. A good credit score will help you gain consumer financing from a reputable consumer finance company. And a well-managed consumer finance company account will help build your credit history and improve your credit report.
This is, however, dependent on the type of consumer finance you have and the financing company in question. Consumer financing can show a history of on-time repayment and make you a lower risk option for a bank or credit union, but too many consumer finance loans can be seen as putting a strain on your finances, especially with high-interest loans that have not had the amount owed significantly decreased since you took it out.
What is a Credit Score?
A credit score, or FICO score, is a score given to you based on your credit report, which is in turn a record of the loans and credit you have used. These scores are calculated by credit bureaus. In general, the lower your credit score, the higher risk you are seen as to loan providers such as credit unions. High-risk customers are less likely to be taken on by credit providers or to receive favorable terms and conditions on credit accounts.
On your credit report there will be several types of information:
- Identifying information
- Collections accounts
- Credit accounts
- Bankruptcies
- Inquiry information
Credit reports are not a matter of public record, and many consumer finance lenders will pay a credit bureau to look at your credit report before approving you for a loan, meaning many consumer finance accounts are reliant on a good credit report. This cost may be passed on to the consumer via processing fees, but the consumer themself can gain a free copy at any time.
Identifying Information
Identifying information doesn’t affect your credit score but does still appear on your credit report. This will be your full name, date of birth, address, and social security number.
Collections accounts
A collections account is an account where payment is overdue and the account has been turned over to a collections agency. These can be a credit account, overdue bills, or money owed for goods and services such as money for healthcare, retail stores, or cell phone contracts.
Credit accounts
Credit accounts are your loans and lines of credit. Information about these accounts on your credit report includes:
- The type of account, such as mortgages, credit cards, or student loans.
- When each account was opened.
- How much money you can borrow, in the case of credit cards or similar
- How large the loan is in the case of loans and mortgages
- The account balance – aka, how much you still have to pay off
- Your payment history, with on-time payments having a positive effect on your credit score and late payments having a negative effect.
However, your credit report may not contain all of your accounts. This can be for a variety of reasons – closed accounts disappear from your credit report after a certain length of time or accounts may not have been disclosed to the credit bureau in the first place.
Bankruptcies
Bankruptcy is a declaration that you have no money and are unable to pay your debts. You can either declare this voluntarily or it may be declared for you by a creditor. After this control of your assets and money will be taken over by a trustee who will deal with your creditors and after a year your debts are written off.
While bankruptcy is effective at clearing your debts, it has a strong negative impact on your credit score and will make it very hard to qualify for loans in the future.
Inquiry Information
Inquiry information is information about when you
Checking a credit report can be a hard or soft check. A soft check is a standard review of the report by either yourself or someone who holds an account for you such as a credit union. Soft checks also include requests for information from companies who have pre-approved you for loans. These do not impact your credit report or your credit score.
A ‘hard’ check does appear on your credit report. This occurs when a company reviews your account because you have applied for a loan or service. This may negatively impact your credit score.
What are Credit Bureaus?
Credit bureaus, or credit reporting agencies, are organizations that keep track of information about consumers regarding the loans they take out and the finance accounts they hold.
There are three major credit bureaus in the United States, which are TransUnion, Equifax, and Experian. These companies receive their information primarily from other finance companies, which send data on their customers normally once a month, such as how much is in an account and whether payments are made on time. This information is sent voluntarily, not compelled by law. The chances are that if you have any finance company accounts, your information is in a credit bureau database already.
What is a Credit report used for?
A credit report is used by companies to decide if you are likely to default on a loan if they approve you for one. This can be requested by companies looking to approve you for a loan or for a credit agreement such as a mobile contract or monthly payment plan on a purchase. Many finance companies will have a minimum credit score required for approval.
How can I improve my credit score?
If you are just starting trying to build your credit score, or have a bad credit score for other reasons, it is very useful to try to instigate credit repair and raise your FICO score in order to get a new credit account. How exactly you do this will depend on your exact financial position, options that are suitable for someone who is just starting out may not be suitable for people with bad credit ratings and long credit histories.
Some ways of doing this are below.
Provide proof of address
The easiest way to do this is to register on the electoral roll, as this does not require you to be a homeowner and works if you are living with roommates or family.
Build credit history
Having no credit history means that finance companies do not have any information about how you manage your money, nor how likely you are to repay a loan. You can begin building a credit history with credit agreements for cell phones or by using low-limit credit cards and paying them off each month.
Make regular payments on time
If you have installment loans, then make sure each payment is on time. If you have a steady income, you should be able to simply set up a standing order and it will happen, but if your income varies, that may take a little more work. Still, the
Get a credit-builder account
Credit builder accounts are credit cards that do not require high credit scores. They tend to have low limits and high-interest rates, and may even cause credit scores to briefly drop.
However, if you keep making the monthly payments to clear the debt, then you will avoid paying interest and can slowly build up your credit rating.
Don’t close old accounts
Managing multiple accounts with a long, mature history shows that you are capable of managing your money effectively, especially if you have not missed a payment. For this reason, it can be beneficial to keep old accounts open.
That said, creditors can close accounts if there is no activity for an extended length of time. While this does not negatively affect your credit report, you may wish to maintain a small level of activity to prevent this from happening.
Get a credit boost
Certain credit bureaus – and it is strongly recommended that you only do this at one of the main credit bureaus – offer instant boosts to your credit score by connecting it to your current account so that they can see how you manage your money. This can be a good option for someone just starting out. Even if you have not had even a starter credit card yet, this can allow you to use utility bills, NetFlix subscriptions and the money in your bank account and savings account to build a credit score without having to go into debt.
However, if your account does not show a stable history, this could have the opposite effect than was intended.
Don’t move home regularly
While this one may not always be possible, finance companies are looking for stability. If you can prove that you have had a single home address for a number of years, this is a good sign that you have not had issues paying rent, for example
Don’t use all of your credit
It may seem counterintuitive, but only using a small portion of your line of credit, and clearing the account on a regular basis will help you build your credit score much faster than reaching the limit of your credit and paying it off.
It may be frustrating, but those who do not need to borrow money tend to be offered better terms as they are seen as less of a risk.
Conclusion
Consumer finance arrangements can take many forms, but the term consumer finance account is most often used to refer to short-term loans with high-interest rates. These can build your credit score if you are careful, and dramatically decrease it if you are not.
When you take out a consumer finance loan, the company you apply to will look at your credit report, your application details, and any information they already hold on you from previous accounts before they approve your loan.
A better credit report will normally give you access to better interest rates and terms on consumer finance accounts as you are seen as less of a risk.
The consumer finance company will be regulated by the laws of the state you are in and accredited by credit bureaus. They will often voluntarily send information to the credit bureaus in order for your credit report to be maintained. This can include information on the amount in your account, your payment history, and any loans you have taken out.
