Which Is Worse for Your Credit, Unsecured Debt or Revolving Credit?

To improve your credit score, which can range from a very low 300 to rarefied 850, you need to focus on what is important. If you are concerned about unsecured debt versus revolving credit, you don’t really have a true understanding of how your credit score is determined. When it comes to branding you with that three-digit number, whether you have unsecured debt or revolving debt does not really matter. What does matter is how you use it.

Unsecured Debt

Unsecured debt is not secured by an asset. Examples are credit cards and hospital bills. People who cannot pay all their bills often choose to stop paying unsecured debt because nothing can be repossessed that way. If you do that, however, your credit score will take a nosedive. Before you stop paying your unsecured debt, try to work out a payment plan with the creditor. You might be able to stretch the payments out longer or get a grace period where you don’t pay for a certain amount of time. If you do work out a deal, get it in writing. Also, request that the creditor not report you to the credit bureaus.

Revolving Credit

Revolving credit is a line of credit a financial institution extends to you. An example would be a home equity line of credit, called a HELOC. You can use your entire line of credit at once, or you can tap into it when needed. If you use your entire HELOC, it could negatively affect your credit score if the HELOC is less than a certain amount. If the HELOC is above a certain amount, it is viewed by the credit bureaus as a second mortgage, and using all if it will not affect your score. Some people believe $50,000 is the magic HELOC number that separates it from being a revolving line or a second mortgage, but that is not confirmed by FICO, the company that developed the credit scoring model. You need to pay revolving credit back according to its terms, and as you pay, it “revolves” back to its original amount. Another type of revolving credit would be a no-limit credit card that typically requires you to bay the balance in full each month.

Your Credit Score

Revolving credit might hurt your credit score more than unsecured debt depending on how your creditor reports it to the credit-reporting agencies. For example, your creditor could report your limit or your high balance. These numbers would only be the same if you have used all the credit available. Otherwise, your limit and your high balance would be different. It would hurt your score if your creditor reported your high balance instead of your limit because credit utilization makes up 30 percent of your score. If your high balance is reported, it appears as if you are maxed out. Sometimes your creditor will report only that you have revolving credit instead of reporting the limit or high balance. That has no effect on your score.

Raising Your Score

If you don’t pay your bills, it doesn’t matter whether you are not paying an unsecured debt or revolving credit -- either way your credit score will take a hit. The same goes if you use all the credit available to you. With unsecured debt or with revolving credit, you should use as little credit available as possible to have the highest credit score. A good rule of thumb is to use no more than half of your available credit.