If you’re wondering how unsecured debt affects your credit score, the first thing to know is that any debt can affect your credit score. If you always make your payments on time – it will affect your score in a positive way. And if you miss some of your payments or do not make them on time – it will affect your credit score in a negative way. Plus, you typically will need to pay late fees and the late payment can stay on your credit report for seven years!
Consequently, if you have an unsecured loan, you will want to make sure to always make your payments on time and adhere to the terms of your loan to avoid your unsecured debt having a negative affect on your credit score.
Second, let’s discuss the two common differences between a secured and unsecured loans – collateral and interest rates.
- Collateral is required for a secured loan. It is something you own that you are willing to give up if you are unable to repay your loan. Typical examples of collateral are your home, auto, other property, and investments. Unsecured loans do not require collateral.
- Interest rates are typically higher with an unsecured loan. Because of the collateral required with a secured loan, there is typically less risk, which again can keep the interest rate lower.
Oftentimes it is easier to get a secured loan because of the collateral. With the proper collateral, borrowers can even have a less favorable credit score – again because there is less risk. Unsecured loans may have a higher interest rate because there isn’t a collateral requirement. In addition, you may be able to borrow more money with a secured loan.
Finally, whether you have an unsecured loan or a secured loan – both can help build your credit, but remember secured loans and unsecured loans can affect your credit score. If you have never borrowed before or have a low credit score, this can be good, in that either loan can help you start building your credit. You will want to make sure that your loan is reported on one of the three credit reports. This is needed for your loan to help build your credit and improve it if you already have a credit history. You can request a copy of your credit reports from several online services. Just Google free credit reports. Some of the popular sites are www.freecreditreports.com, www.annualcreditreport.com, and www.creditkarma.com.
Bottom line – unsecured debt can affect your credit score positively or negatively. So only borrow what you can afford to pay back…and always pay on time!
This will always have a positive effect on your credit score!