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Secured Credit vs. Unsecured Credit

A secured credit item is a loan or line of credit that is backed by an asset. Secured debts include things like car or boat loans and mortgages but can also include loans or credit cards that have a client’s upfront funds attached to them. With a secured credit card, the applicant places funds that typically equal the amount of the credit they are looking for into an account with the lender that they can not touch. The lender then provides them with a credit card for that amount. Since the card is secured by physical money the lenders tend to provide a lower interest rate than they would if it were unsecured credit. If a secured credit account becomes past due or goes into collections the lender can use the original money used to secure the card to pay the balance. Similarly, with a secured loan such as a mortgage or auto loan, if the loan becomes delinquent, the creditor can take or “repossess” the collateral that was initially put up to qualify for the loan. They would do this in order to sell the physical property and payoff the loan.

Unsecured credit is an account that is not backed by anything physically, only by the applicants’ credit score and repayment history. Regular store cards or overdraft lines of credit are two types of unsecured credit. These types of accounts tend to have a higher interest rates compared to secured credit because they are riskier for the lender. Since each account is backed only by the persons credit score, the higher interest rates are meant to offset any losses the lenders will see.