While some types of debt can boost your credit score, others can hurt it. When it comes to house hunting, this is a big deal. Credit scores are often the make or break factor for prospective buyers looking to get pre-approved for a mortgage. As you consider debt, it’s important to know that debt comes in two forms.
Secured Debt
Secured debt is a loan guaranteed by collateral. It is this collateral which gives the lender a measure of security. In the event a borrower is unable to meet their financial obligations, the lender will be able to recoup at least some of their losses by collecting the collateral. Secured debt loans include:
- Mortgages – The home being purchased is used as the collateral. In the event a borrower is unable to make their monthly mortgage payment, the lender will take possession of their home.
- Auto Loans – Auto loans are another form of secured debt. In this case, the automobile is the collateral.
Unsecured Debt
Unsecured debt is a loan extended without collateral. In the event a borrower is unable to meet their financial obligations, the lender will not be able to recoup their losses.
- Student Loans – A student loan is given without any collateral. In the event a borrower is unable to make their monthly payments, lenders have no way to recoup their losses.
- Payday Loans – Similarly, payday loans are given without any collateral being presented to the lender.
- Credit Cards – While the credit extended by credit card companies is given for a shorter period of time, it is still an unsecured debt.
Which Loans Hurt and Which Loans Help Your Credit Score
In most cases, secured debt is considered more favorably. This is especially true of debt that you previously carried, but have paid off.
However, student loans are typically the exception to the rule. Not only can paying off student loans help you build a strong credit history, student loans can often be directly linked to a higher earnings potential.
Ready to see how your debt or lack thereof affects your mortgage? Give me a call today.
