How Does Unsecured Debt Affect Credit Rating?

You can divide credit into to main categories: secured and unsecured. Both forms of credit have an impact on your credit rating, but it is not so much the kind of credit that matters as much as it is how you use your credit. Using unsecured credit irresponsibly will lower your credit score and make it harder to get a loan.

Unsecured Credit

Unsecured credit is a form of a loan in which the creditor does not require a security interest in the borrower's property. The most common is the credit card. Credit card issuers typically do not require you to give them a security interest, such as a lien or a security deposit, before you can get a credit card.

Credit Rating

Your credit rating, expressed as a credit score and based on a credit report, is how creditors evaluate your ability to use credit. A creditor uses your credit score to determine if you should get a loan, and if so, what kind of terms to give you. A person with a positive credit rating can more easily get new forms of credit and better terms, while those with bad credit ratings have a tougher time obtaining credit.

Unsecured Credit Use

How you use unsecured credit impacts your credit rating. Creditors and credit rating companies use different factors to determine your credit rating, such as your bill payment history, average age of your accounts and number of new accounts you recently opened. If, for example, you have had several credit cards for many years and have never missed a payment, you probably have a good credit rating. If, on the other hand, you have recently opened several new credit cards and have already missed some payments, you probably have a bad credit score.

Improvement

Using unsecured credit can actually help you get a better credit rating. If, for example, you've gone through a bankruptcy and have a bad credit score, you can use a credit card to help you improve your score. You can't change what happened before, but as long as you can show creditors that you are able to pay your bills and meet your debt obligations, you can improve your credit rating.