When it comes to the risk obtained by lenders and consumers, secured credit and unsecured
credit are two very different things. Come with us as we explore these two different types of
credit and how they can have an impact on your credit score.
What Is Secured Credit?
Any form of credit that is backed by a physical asset for collateral is what we call secured credit.
If you borrow with secured credit and default on your loan, the lender can strip you of your asset
to recover the loss they endured.
Whenever you take an auto loan out, for example, the collateral on that loan becomes your
automobile. You don’t actually own your vehicle until you pay the lender off. If you are unable to
pay the lender back, they can take the car back from you through the process of repossession.
The same thing goes when a consumer takes out a mortgage. Mortgage loans use homes as
collateral. You never actually own your home until you finish paying it off. The bank can
foreclose on your home if you are unable to pay it off. This means that the bank can evict you
from your house and sell it to another person.
If you’ve ever received a loan through a pawn shop, they are also secured.
One unique form of secured credit is a secured credit card. Most credit cards are unsecured,
though not all consumers can qualify for an unsecured card because of a lack of credit history or
bad credit. When you get a secured credit card, you make a deposit to the lender. If you are not
able to pay your credit card off on time, the lender can then take that deposit.
What Is Unsecured Credit?
Unsecured credit does not use any form of collateral, meaning even if you default on your debt,
the lender cannot take your asset back.
One example of unsecured debt is a student loan. If you do not pay back your student loans, the
bank or lender cannot take away any material assets. Generally, credit cards are unsecured
credit, except for those that we mentioned above.
How These Types of Credit Impact Your Score
When it comes to credit scoring models, secured credit and unsecured credit are equals. Your rewards or penalties are not based on whether the credit was secured or not.
If you are really trying to impact your score, you might consider authorized user tradelines.
Here at Boost Credit 101, we like to make sure that our customers have the best understanding of tradelines so they can make the best financial decisions for their futures.
Working towards good credit often seems like an uphill battle, and we get it. That is why we believe it is so important to have the right company by your side, as the right company can provide you with all of the necessary knowledge and tools to get you through the tradeline buying process.
Are you ready to take your first steps toward better credit?
Make sure to get in contact with us!