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

by Mack Mitzsheva

    A credit score is fluid, and a change in the information in your credit report can create a change in your credit score, either up or down. A FICO score looks at your payment history, the length of your credit history, amount of debts you have, the mix of credit account types on your report and new credit you've applied for. Both unsecured and secured debt appear on a credit report, and each has an effect on your credit score.

    Unsecured debt is debt that isn't secured by a piece of collateral. Examples of unsecured debts are credit cards and personal loans. Unsecured debt is reported to the credit bureau. For credit cards, the lender reports the credit limit and the balance on the credit card. For a personal loan, the lender reports the loan amount. Lenders report payment information on these accounts as well. This includes on-time payments and late payments. Your report will also show a decrease in the balance as you pay it off or an increase in the balance when this occurs.

    Secured debt is debt that's secured by a piece of collateral. An example of a secured debt is a mortgage, which is secured by the home, and a car loan, which is secured by the car. Secured debt is reported to the credit bureaus in the same manner as unsecured debt. Your credit report reflects the loan amount, payment history and balances on the account. Unlike unsecured debt, however, if you default on a secured debt, the lender may seize the secured property.

    For the most art, secured and unsecured debt affect your credit in a similar fashion. Late payments on a secured debt affect your credit score in the same manner as a late payment on unsecured debt. FICO credit scores start at 300 and go up to 850. According to FICO, one 30-day late payment can drop your credit score from 60 to 110 points. The later the payment, the more damage it does to your credit score. The other information found in your credit report determines how much your credit score drops because of late payments.

    If you default on unsecured debt the lender reports the account as past due, along with the outstanding balance, and if it's delinquent for more than 150 days, the status of the account will read charged-off, meaning the lender wrote the debt off as a loss. If you default on a secured debt and the lender seizes the property, the lender also reports that seizure to the credit bureau. If it's a car, this seizure is called a repossession. If it's a mortgage, the seizure is called a foreclosure. Charge-offs, repossessions and foreclosures are serious delinquencies, and each has a negative impact on your credit. A foreclosure alone can drop your score from 85 to 160 points, according to FICO. Again, how much a score drops varies and depends upon the other data found in your individual credit report.

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    About the Author

    Mack Mitzsheva is a tax lawyer, personal finance expert and the author of the forthcoming ebook, "10 Best Places to Work Online." Mitzsheva is also a social media entrepreneur with five successful sites under her belt. Always innovative, Mitzsheva is currently developing a cutting-edge budgeting app for newlyweds.

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