Secured Vs. Unsecured Debt for a FICO Score

Your FICO credit score is a three-digit number between 300 and 850 distributed by Fair Isaac Corp. It helps your creditors determine the risk involved in lending to you. Generally, the higher your credit score is, the better your chances are of obtaining credit at favorable interest rates. Several factors affect your credit score, including the amount of secured and unsecured debts you hold.

Secured vs. Unsecured

A secured debt is a loan or line of credit with an asset or cash available to the lender as collateral. Secured debts represent lower risk to the lender, as a default on a secured loan means repossession and sale of the collateral used to secure the debt. Examples of secured debt include most installment loans, auto loans, mortgages and secured credit cards. Unsecured debt, on the other hand, indicates trust on behalf of the lender that as the borrower, you will repay your debts. There is no asset or collateral used to secure the debt, but instead you receive a line of credit with a cap on the amount of money you may borrow, known as a credit limit.

FICO Score Calculation

While your credit report contains information about both your unsecured and secured debts, Fair Isaac Corp. places more emphasis on your payment history and the amount of debt you owe than the types of debts you owe. The amount you owe and your credit history make up 65 percent of your total credit score, where as the type of credit you have accounts for much less of the calculation at just 10 percent. According to MyFICO.com, you should maintain both secured and unsecured debts and avoid opening too many accounts.

Improving Your Score

To improve your credit score, pay down your credit cards, but do not close the accounts. Try to keep your balances below 35 percent of your available credit at all times. Your FICO score will suffer from an over-extended use of credit. Regarding your secured debts and installment loans, it makes less of an impact to your FICO score if pay them off early than it does if you simply make your payments on time. If you want to boost your score quickly, use extra money to pay down unsecured debts instead.

Considerations

While FICO scores remain the leading scoring model for lenders who want to analyze the risk associated with potential borrowers, there is a rising interest in other factors your FICO score doesn't measure. Several new scoring models are emerging that rate your credit history, as well as habits in your checking and savings account usage, employment history and property value. While FICO provides plenty of information about its FICO score calculation formula, many newer scoring models are more secretive.