Secured Vs. Unsecured Debt for a FICO Score

Using secured or unsecured credit responsibly can boost your FICO score.

Using secured or unsecured credit responsibly can boost your FICO score.

Building and maintaining a good FICO score is crucial, especially when you're planning to buy a home, finance a vehicle or make any purchase without paying cash up front. Taking on a manageable amount of secured or unsecured debt can help your score in the long run. Secured debt requires collateral, such as real estate, securities or your vehicle, while unsecured debt does not.

Secured Debt

If you default on a secured loan, the lender will take the collateral you offered as part of the loan terms. Depending on the type of loan, the collateral could be your car, your investments, or even your home. Secured debt and unsecured debt both can help you build your FICO score if the lender reports the loan and its payments to the three major credit bureaus -- Equifax, Experian and TransUnion. Making all payments in full and on time could increase your score over time. Secured loans, such as a car loan or a mortgage, are installment loans. Unsecured debt can be revolving, meaning you can repay and borrow money as long as you have available credit.

Unsecured Debt

Unlike secured debt, with which you risk losing an asset, unsecured debt does not require collateral. The lender takes on more risk. Generally you need a FICO score of 640 or greater to be approved for unsecured debt. Some companies will take a slightly lower score, but you'll pay a higher interest rate. The lender determines your loan amount or credit limit based on your debt-to-income ratio and FICO score. Credit reporting agencies do not differentiate between secured and unsecured debt when calculating your score. But 10 percent of your score is based on the types of debt you have.

Use Credit Wisely

Any debt can affect your FICO score. To optimize your score, carry a balance less than 10 percent of your available credit on credit cards and make all payments on time. According to MyFICO, credit utilization counts for 20 percent of your total score. On-time payments count for 35 percent of your overall score.

About FICO

Your three-digit FICO score, assigned to you by Fair Issac Corp., lets creditors know how likely you are to pay back your debt. Scores range from 300 to 850; the higher your score, the more likely you'll get credit. An excellent FICO score -- one of 740 or higher -- will garner the lowest interest rates, saving you thousands of dollars over the course of the loan.

About the Author

Tracey Lamphere has more than 15 years of experience as a reporter and editor. She has contributed to Sound Publishing newspapers in Washington state. Lamphere also specializes in marketing communications and copywriting. She has a Bachelor of Science in business journalism from the University of North Texas.

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