What is an Unsecured Line of Credit?
June 17th, 2009, Written By: Kerri Randall
When you are extended an unsecured line of credit, it means you will not have to provide any collateral to be approved. This is a riskier investment for a lender than a secured line of credit, but it’s a good deal for you.
In order to qualify for unsecured credit, you must already have a high credit score, and the only way to do that is to be responsible with your finances. A positive credit history will show that you have not made any late payments, defaulted on any loans, filed for bankruptcy, etc, and that you’ve had open accounts for quite some time. The longer your positive history, the higher your score is likely to be. When you’ve proven that you are a dependable borrower, lenders are more willing to take the risk of allowing you an unsecured line of credit, which also comes with lower interest rates.
With a secured line of credit, you need to provide security for the lender, and this is generally in the form of opening a savings account that is tied to the credit line. The credit limit is then determined by the amount that you deposit. How is this different from a debit card? You can establish and/or rebuild your credit score. If your score is low for any reason, you may be more likely to qualify for secured credit. The lender is assured a return on their investment by insisting on the savings account that essentially pre-pays for your purchases, as well as charging you an annual fee and a high interest rate.
To make sure you can qualify for an unsecured line of credit in the future, you can use a secured line of credit now as a way to build your score. Secured credit is obviously less desirable due to the restrictions and fees, but it’s easier to qualify for when your score is low. If you manage it well, you can use it to your advantage and get out of your rut and back on track.
Categories: Money Resources
