How Does Unsecured Debt Vs. Secured Debt Affect Credit Ratings?

Any type of debt you have -- student loans, auto loans, credit cards -- will affect your credit, depending how big it is, whether you pay it off and whether you make those payments on time. In most cases, whether a debt is secured or unsecured doesn't affect your credit score much.

Types of Credit

Roughly 10 percent of your credit score is based on whether you have more than one type of debt. If all you have are unsecured credit cards, that's not good for your score. Neither is having a mortgage but no credit cards account. From the credit industry's view, the dividing line isn't exactly secured versus unsecured but installment versus revolving. Car loans and mortgages are installment payments: when you pay off the loan, it's gone. Many unsecured debts are revolving: once you wipe out your credit card bill, you can re-use the credit you freed up.

Secured Credit Card

If your credit rating is already in free fall, a secured credit card may be a way to stop the slide. Finding an unsecured card at a decent interest rate is tough if your score is bad. Secured cards are easier to take out because you set up a bank account to back up your credit line: If you have $700 in the account, you can charge $700 on the card.

Rebuilding Credit

Once you have a secured card, use it regularly, and pay as soon as the bill comes in. Payment history is the biggest single factor influencing your credit score, so using and paying off your card helps drag your credit score out of the gutter. Talk to the issuing bank before taking out the card: You want a bank that will report your timely payments to the major credit bureaus, preferably without mentioning it's a secured card. After a year of payments, you should be able to land an unsecured card.

Considerations

The effect of unsecured versus secured debt on your credit score is minor compared to your payment history, the amount you owe on your credit accounts and how long you've had the accounts open -- longer is better. The real difference between the types of debt is the secured creditor's right to take your assets. If you're having serious trouble paying your bills, taking out a car loan on top of your credit cards may boost your credit score slightly -- but if you can't pay, you not only damage your credit rating: you also lose the car.

About the Author

Author of two film reference books, "Cyborgs, Santa Claus and Satan" and "The Wizard of Oz Catalog." Published in Air & Space, Backpacker, Newsweek, The Writer, and multiple trade journals (can fax samples if requested, don't have them available digitally)