Secured vs. Unsecured Debt: Which Impacts Credit More?

(Article Updated April 12, 2019) 

Ever wondered what the difference is between secured and unsecured debt? It’s pretty straightforward. If it’s a secured debt, the loan is backed by some type of collateral, such as a house or a car. With unsecured debt, there is no specific item the creditor can seize if the borrower defaults, as is the case with credit cards.

So are unsecured and secured debt treated differently when it comes to calculating your credit score and your credit worthiness? 

According to Anthony A. Sprauve, senior consumer credit specialist at FICO, the answer is no.

“When considering how debt is paid, the FICO score does not differentiate between non-payment or late payment of secured or unsecured credit,” he said.   

He goes on to say that in considering balances and utilization information, revolving credit balances (i.e., credit and retail store cards) generally have a bigger effect than the same measures on installment products such as a mortgage or car loan.

“Credit utilization – how much credit is being used versus your available credit – does look primarily at revolving and unsecured debt, which is typically credit cards,” he said. “Credit utilization accounts for 30 percent of the FICO score.”

The main difference between the two types of loan is in how the creditor will collect repayment if you don’t pay. When you buy an item with a credit card and don’t pay it, the bank cannot take any item or items back as repayment. In order to get payment, the bank that issued you the credit card will sue you and try to collect the money you owe. If it goes to an extreme point, the creditor can get a court judgment that will allow garnishment of your wages and bank accounts.

Other examples of unsecured debt, in addition to all manner of credit cards – including gas and department store accounts (other than ‘secured’ cards, where you put cash down and it serves as the card’s limit and available credit) – there are medical, dental or legal bills, student or personal loans and even union dues.

Secured loans however, are considered priority debt. If the bank doesn’t get paid, they can have collectors seize the collateral for payment. In the case of your house, they can start foreclosure proceedings.

Types of secured debt include:

  • mortgages
  • home equity loans and HELOC’s
  • auto loans
  • retail financed purchases with a security agreement (if you don’t pay you have to give back)
  • secured personal loans

Types of unsecured debt include:

  • credit cards
  • student loans
  • medical bills
  • utility and telecom bills
  • financed retail purchases without a security agreement
  • payday loans


What events affect credit score negatively

The impact of certain events on your credit score depend highly on your starting score, according to FICO. For example, if you have a credit score 680 and you are 30 days late on your mortgage; your score could decrease by as much as 80 points. A foreclosure can cause your score to drop anywhere from 105 points to 160 points. If you have an initial score of 780 and foreclose, your score may drop 110 points. Declaring bankruptcy is even worse. In this case, your score can plummet 240 points if you start with a score of 780.

According to FICO, the exact impact of a certain factor on your credit score or credit worthiness depends on the overall picture of your credit report which is what the credit score is based on. Since each credit report is different and individual to a person’s particular situation, the credit score is determined in an individual manner.

Originally Published August 10, 2018, LLC does not provide legal, investment, accounting or tax advice, please consult a financial expert for more information on this subject.