You need a loan to expand your business, consolidate debts, or cover unexpected costs. You opt for a secured loan because it offers lower interest rates and a higher borrowing limit. But then a question pops into your head, does a secured loan affect your credit score?
Your credit score is like your financial reputation. It influences your ability to borrow money, get a mortgage, or even secure favourable business deals. Understanding how secured loans impact your credit score can help you make smarter financial decisions and avoid common pitfalls.
In this article, we’ll break down the effects, both positive and negative, of secured loans on your credit profile, offering real-life perspectives and actionable strategies.
If you have bad credit or are trying to build your credit history, you may be wondering how a secured loan can help raise your credit score. Secured loans require collateral, so they present less risk to lenders. Making on-time payments shows you can responsibly manage debt and improves your creditworthiness over time. But how much of a boost can you really expect from a secured loan? Let’s take a detailed look at what impacts your score and how high it could go with this credit-building tool.
What is a Secured Loan and How Does it Work?
A secured loan is backed by an asset you pledge as collateral. Common examples are mortgages auto loans, and some personal loans. If you fail to repay the loan the lender can take the collateral to recover their money. This reduces their risk compared to unsecured loans that lack collateral.
To get a secured loan, you provide the lender with an asset appraisal to determine the loan amount You’ll make fixed monthly payments over a set repayment term, like with an auto or mortgage loan The lender reports your payment activity to the credit bureaus. Handled responsibly, this establishes your creditworthiness and raises your score.
Key Factors That Determine Your Credit Score
Several key factors shape your credit score. Understanding these is important to see how a secured loan can help build your profile:
-
Payment History – On-time payments are crucial Late or missed payments seriously damage your score Secured loans allow you to demonstrate responsible payment behavior,
-
Credit Utilization – This measures how much of your available credit you use. Going over 30% utilization on any account can lower your score. Secured loans provide an additional credit line to help manage this ratio.
-
Credit Mix – Lenders like to see you can manage different types of credit, like installment loans and revolving accounts. Secured loans add healthy installment loan diversity.
-
Credit History Length – Scores improve with a longer credit history. Secured loans help establish this crucial foundation.
-
New Credit – Applying for multiple new accounts in a short period can lower your score temporarily. Get your secured loan lined up, then avoid new applications while your score builds.
How High Could Your Credit Score Go?
A secured loan alone won’t guarantee a “good” credit score, usually considered 670 and above. But used strategically as part of an overall credit management plan, it can help raise your score significantly over time. Here’s what you might expect:
-
Starting from no credit history – Opening a secured installment loan or credit card is a great way to establish a credit file. Expect to have a FICO score after about 6 months of reporting. With responsible use, a score in the mid-600s is achievable within 12-18 months.
-
Starting from a fair credit score (630 – 689) – If you already have some credit foundation, an additional secured installment loan can help gradually improve your mix of accounts and payment history. Over 12-24 months, a score increase into the low 700s is realistic.
-
Starting from a good credit score (690 – 719) – With already good credit, secured loans likely won’t raise your score much higher. Focus instead on maximizing positive behaviors like low balances and on-time payments across your existing accounts.
-
Starting from a bad credit score (300 – 629) – Significant score increases are possible, but don’t expect miracles. Be prepared for a long journey of responsible financial habits. Over several years of diligent credit management, including the secured loan, scores of 650+ are achievable.
Strategies to Maximize Your Credit Score Improvement
Secured loans offer a valuable credit-building tool, but need to be managed carefully. Here are some tips to help maximize their positive impact on your score:
-
Make every payment on time – set up autopay if it helps. Payment history is #1 for your score.
-
Keep credit utilization low across all accounts – aim for less than 30%.
-
Build credit diversity – add new types of credit carefully over time.
-
Let your length of credit history grow – avoid closing old, paid accounts.
-
Monitor your credit reports – dispute any errors with the credit bureaus.
-
Be patient – scores improve gradually with consistent good financial habits.
The Bottom Line
A secured loan can be an excellent way to establish or rebuild your credit, especially when combined with other responsible money management practices. While amounts vary based on your starting point, score increases of 50-150 points or more are achievable over 1-2 years of diligent credit building. Track your progress, stay focused on positive behaviors, and let the power of time work in your favor. With a strategic long-term plan, a secured loan can put you well on your way to the credit score you deserve.
Risks of Secured Loans on Your Credit Score
- Missed or Late Payments – If you miss a payment, your credit score will take a hit, and it will remain on your report for up to six years.
- High Debt Load – Taking on a secured loan adds to your overall debt. If your debt-to-income ratio becomes too high, it may negatively affect your credit rating.
- Risk of Losing Your Asset – If you default, the lender has the right to repossess the collateral, which could mean losing your home, car, or business asset.
Learn essential tips to avoid defaulting on a secured loan for business and understand the potential risks involved in our guide on How to Avoid Defaulting on a Secured Business Loan.
Factors That Influence the Impact of Secured Loans on Your Credit Score
- Payment History: Consistently making your loan payments on time is the biggest factor in keeping your credit score healthy. Even one missed payment can cause a significant drop. Discover the role of credit scores in obtaining business loans and how payment history plays a crucial part in our article The Role of Credit Scores in Obtaining Business Loans in the UK.
- Loan Amount: Borrowing within your means ensures you don’t struggle with repayments. A large loan with high monthly payments can stretch your finances too thin.
- Length of Credit History: If this is your first loan, making regular payments can strengthen your credit profile over time.
- Existing Debt: If you already have multiple loans or credit cards, adding another loan may affect your ability to keep up with payments.
- Lender Reporting Practices: Not all lenders report to credit agencies. Choosing a lender that does ensure your responsible payments count toward building your score.
“A secured loan won’t impact my credit score.”
False. Just like any other form of credit, secured loans are reported to credit agencies and will influence your score.
“Missing one payment won’t hurt much.”
Not true. Even one missed payment can cause a significant drop in your credit score and make it harder to borrow in the future.
“I should avoid loans if I have a low credit score.”
Not necessarily. If used correctly, secured loans can actually help rebuild a poor credit score.
How Much Will a Secured Loan Improve My Credit Score
FAQ
How much will a secured loan improve my credit score?
Responsible borrowing shows you’re not overly reliant on credit. Diversify Your Credit Mix – Credit agencies reward borrowers who successfully manage different types of credit. If you only have credit cards, adding a secured loan can help improve your credit mix, which makes up about 10% of your overall score.
How can I raise my credit score by 100 points in 30 days?
How much will your credit score go up with a secured credit card?
It’s impossible to predict how much your credit can improve by using a secured credit card since it largely depends on the details in your credit history. But using a secured card responsibly can help you build credit over time.
Does getting a secured loan affect your credit score?
When you take out a secured loan, many lenders will add a record of it to your credit file. This may reduce your credit score. However, if you make your loan payments on time, the long term effect on your credit score is usually positive. If you default on your loan, a record will go on your credit file.