Definition

• Unsecured credit refers to an account that does not have any money or collateral guaranteeing repayment, according to the Merchant Services payment processing glossary. Secured loans such as mortgages or car loans allow the lender to seize the home or vehicle if the account holder stops paying. Unsecured loans, which take the form of credit cards and personal loans, do not have anything backing them up other than the borrower's signed contract.
  
  

Considerations

• Unsecured credit is more difficult to obtain because the lender cannot seize any collateral to offset its losses if you default on the account. You must have a good credit history to be approved for credit cards and unsecured loans. You may still be able to get them if your credit is marginal, but the lender will charge a higher interest rate and may also tack on fees. The lender expects additional profit to make up for the higher risk.
  
  

Effects

• Unsecured credit appears on your credit reports with Equifax, TransUnion and Experian. These accounts will raise your credit score if you make all of the payments on time. FICO, the largest credit score provider, explains you should maintain a mix of unsecured and secured credit for the highest possible score. You should also avoid using all of your available credit lines as this can negatively impact your credit rating.
  
  

Misconceptions

• Some borrowers believe it is safe to default on unsecured credit because the lender cannot seize a specific asset. However, the lender can go to court and get a judgment based on the loan or credit card contract. This lets the lender potentially garnish the person's wages or place a lien on certain types of property, depending on the state. The unsecured account may also be sold to a collection agency, which will aggressively pursue repayment.
  
  

Alternative

• You may be able to get a credit card or loan even if your credit score is low. Some banks offer secured credit cards, which are different than the traditional unsecured variety because you open a savings account and make a lump sum deposit. That money guarantees payment of the card because the bank can take take the money from your savings account if you default. Your credit line is equal to your initial deposit amount, although the bank may raise it if you build up a good payment track record. You can get a loan if you find a co-signer with good credit. This is typically a family member, as the person must agree to be fully responsible for repayment if you default.