Does a Secured Loan Affect Your Credit Score?

A secured loan is a type of financing backed by an asset, known as collateral, such as a home or vehicle. This collateral provides security for the lender, reducing their risk. Secured loans often come with more favorable terms, including lower interest rates, compared to unsecured alternatives.

The Basics of Secured Loans and Credit Reporting

Lenders report secured loan activity to the three major credit bureaus: Experian, Equifax, and TransUnion. This reporting provides updates on the loan’s status throughout its term. Information shared includes the original loan amount, payment status for each billing cycle, account open and close dates, current balance, loan term, and any missed or late payments. This data allows credit scoring models to assess how an individual manages their secured debt and impacts their credit score.

Positive Influences on Credit Score

Managing a secured loan responsibly can enhance a credit score through consistent on-time payments. Payment history is a major component of credit scoring models, often accounting for approximately 35% of a FICO Score. Every timely payment builds a positive track record, demonstrating financial reliability.

Secured loans, such as auto loans or mortgages, are considered installment credit, which contributes to a healthy credit mix. A diverse credit portfolio, including both installment and revolving credit (like secured credit cards), shows an ability to manage different types of debt. Credit mix accounts for about 10% of a FICO Score.

The duration an account remains open and well-managed positively affects the length of credit history, which makes up about 15% of a FICO Score. A long-standing secured loan account with a strong payment history adds to the average age of accounts, signaling stability and experience to credit scoring models.

For secured credit cards, keeping the credit utilization ratio low is another positive factor. This ratio, which measures the amount of credit used against the total available credit, influences about 30% of a FICO Score. Maintaining balances below 30% of the credit limit demonstrates prudent use of revolving credit.

Negative Influences on Credit Score

Conversely, mismanagement of a secured loan can damage a credit score. Missing or making late payments is harmful, as payment history is a dominant factor in credit scoring. Even a single payment reported 30 days or more past its due date can cause a significant drop in credit scores and remain on a credit report for up to seven years.

Defaulting on a secured loan, which means failing to repay the debt as agreed, leads to severe consequences. This can result in the repossession of collateral, such as a vehicle, or foreclosure on real estate. These actions are reported to credit bureaus, creating derogatory marks that stay on a credit report for up to seven years and cause a substantial decline in credit scores.

For secured credit cards, carrying high balances or maxing out the credit limit negatively impacts credit utilization. A high utilization ratio signals increased risk to lenders, potentially lowering a credit score.

Applying for a secured loan results in a hard inquiry on a credit report. This occurs when a lender checks an applicant’s credit history to assess their creditworthiness. While a single hard inquiry usually causes only a small, temporary dip in a credit score, multiple inquiries in a short period can accumulate and signal greater risk.