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

Your credit score indicates how financially responsible you are for landlords, employers and lenders, and while a small percentage of your score depends on the type of credit you possess, the majority of your score looks instead at how you handle your debt. Still, it's important to understand the differences between your unsecured and secured debt and the ramifications each has on your credit and your life.

Unsecured Debt

Unsecured debt is always reported to the credit bureaus as a reflection of the way you manage your money. It is debt that isn't tied to any collateral, such as a car or home. The two biggest factors in calculating your credit score are whether you make your payments on time (35 percent) and how much debt you're carrying in relationship to your credit limits (30 percent). This second factor is called your debt utilization ratio. If you don't make payments on your unsecured debts within 30 days of the due date, your credit score may fall by as much as 100 points.

Secured Debt

Not all secured debt is reported to credit bureaus. Finance experts recommend that people who are building or rebuilding credit ask lenders whether the actions on their secured credit card offerings are reported to the credit bureaus -- if not, they aren't doing making any progress toward laying the foundation for obtaining credit. If a secured debt, such as a mortgage or auto loan, is reported to the credit bureaus, it is judged by the same factors as your unsecured debt, with timely payments and debt utilization ratio being calculated into the overall score. About 10 percent of your credit score is based on the variety of credit you have, and secured debts may help to contribute to the mix.

Credit Cards

Unsecured debt generally carries higher interest rates because it isn't tied to any kind of collateral. In most cases, people use unsecured credit cards; however, those who don't qualify for credit or who are only offered high interest rates because of a lack of or bad credit history may opt for secured credit cards. With secured credit cards, you make a deposit into an account, and that is typically the limit for that card. For example, if you have placed $500 into an account, you may only spend up to $500 on the card. After responsibly using a secured credit card for several months or a year, borrowers may be better qualified for unsecured credit cards.

Considerations

Large debts make a larger impact on your credit. For example, a mortgage is a secured debt. If your house is foreclosed upon, it may negatively impact your score by as much as 200 to 300 points, according to Bills.com co-CEO Andrew Housser. In bankruptcy, unsecured debts may be cleared, while secured debts are generally liquidated, meaning that the object or funds securing the loan are taken away and/or sold.