Secured credit cards are great for credit newcomers or anyone looking to rebuild their credit. With a secured credit card, you put down an upfront security deposit equivalent to your credit limit, and any activity on the card will get reported to the credit bureaus. Over time, your credit score will gradually improve as you make consistent on-time payments and manage your credit responsibly.
Once your secured credit card has served its purpose, you may want to graduate from a secured card to an unsecured card. While you may get tempted to keep your account open, you probably do not want to get stuck with low credit limits and high fees for too long. Depending on your circumstances, you can either apply for a new unsecured card with another lender or upgrade to an unsecured card with your current issuer.
Both options could potentially impact your credit score. We will go over the effects of closing a secured card on your credit and ways you can move on without damaging your credit too much.
- A secured credit card can help consumers establish or rebuild their credit.
- Closing your secured credit card account can impact your credit utilization ratio, length of credit history, and credit mix all of which factor into your credit score calculation.
- You will need to take several steps to permanently close your secured credit card, including paying off outstanding balances, checking your credit reports, and updating other accounts.
- If you want to upgrade to an unsecured credit card or traditional credit card, you can request to upgrade directly with your current creditor or apply for a new card with a new lender and close your secured credit card account.
Building Credit with a Secured Card
If you have a low credit score or limited credit history, a secured credit card is a great option to help you establish or build your credit. When you apply for a secured card, your lender will request a deposit to guarantee your credit line and minimize their risk.
Like any other credit card, you can use your secured card to purchase goods and services and make monthly payments to pay off your bills. When you apply for a new secured card, confirm that your card issuer reports your activity to the three main credit bureaus Experian, TransUnion, and Equifax as lenders will use that information to evaluate your creditworthiness.
Developing a solid payment history will help you improve your credit and increase your chances of qualifying for additional loans or better credit cards in the future. Note that a secured card is not a quick fix for boosting your credit. You will still need to do the work by establishing a history of on-time payments and low credit utilization.
You can check the progress of your credit goals by monitoring your credit reports and scores regularly. AnnualCreditReport.com offers online credit reports from each of the three main credit bureaus for free to all consumers.
Impact of Closing a Secured Credit Card on Your Credit
If your credit has improved significantly since opening your secured credit card, you may be thinking about closing your account. Before you do so, you should assess the impact on your credit score first. If your secured card currently gets reported to the credit bureaus, there are several factors of your credit score that can get affected:
- Credit utilization ratio: Your credit utilization ratio is how much credit you use compared to your total credit available. When you close an account, you reduce the amount of credit you have available, which could cause your credit utilization to go over the 30% maximum recommended by financial experts. If that happens, it could cause your credit score to drop because you are using more credit than lenders would like.
- Length of credit history: When you close a credit account, that could reduce the average account age of your credit history. If you have had your secured credit card for a long time compared to your other cards, closing it could significantly lower the average length of your credit history and hurt your credit score.
- Credit mix: Lenders like to see that you can manage different types of credit. So, if you have a secured credit card and student loans, for example, that shows you can balance both revolving and installment credit accounts. If your secured credit card is your only form of revolving credit, closing it could reduce your credit mix and impact your credit.
If none of these factors are a concern, the good news is that the strong credit history you have established with your secured card will stay on your credit reports for up to 10 years. That means you will qualify for better loans in the future.
Reasons to Close Your Secured Credit Card
While closing your secured card can hurt your credit, everyone’s financial situation is different, and there are situations where closing your account may make sense. If you have trouble spending within your means, you may want to close your card to start spending more responsibly. If the card has a relatively high annual fee compared to the benefits, it is not worth keeping the card open. Or, if your credit has improved significantly since opening the card, it may be time to switch to an unsecured card.
Depending on the lender, some secured credit cards will increase your credit limit after some time. Others may automatically upgrade you to an unsecured credit card after you make a certain number of consistent, on-time payments. In that case, they will refund your security deposit, and you will be able to start using your unsecured card.
Before making the transition, review your balance and the terms and conditions. If your secured card does not have an annual fee and you are not paying any late fees, keeping the card does not cost you anything. Additionally, if you owe any money on the account still, you will need to pay that off first.
How to Close a Secured Credit Card
If you have assessed the benefits and costs of closing your secured credit card account and feel that it has served its purpose, some steps you can take include:
- Paying off existing debt: If you have an outstanding balance on your card, you will need to pay it off in full first. Otherwise, the lender may use your security deposit to cover the remaining balance.
- Closing the account: You can call the number on the back of your card to speak to a representative to help you close your account. During the call, take notes of who you spoke with and their instructions. Alternatively, you can mail or email your credit issuer and get written confirmation of the closure. Do not forget to ask for your security deposit and confirm the amount and date you should expect to get the money back. Usually, you should receive your security deposit within 60 to 120 days, but that can vary depending on the company.
- Updating other accounts: If you have other accounts linked to your secured card, make sure to update those. For example, if you have automatic payments enabled, you can disconnect your bank account since you are not making payments anymore.
- Checking your credit reports: If your creditor reports your secured card activity to the credit bureaus, double-check that the card closure gets reported correctly.
- Destroying your card: Once you have confirmed that your account is closed, it is best to shred your card and throw it away. That way, you can help prevent identity theft and protect yourself.
Upgrading to an Unsecured Card
Unsecured credit cards, or traditional credit cards, do not require a security deposit and generally offer higher lines of credit. You can also earn cashback on purchases such as restaurants, travel, and gas depending on the card you get. Some may also come with additional perks, such as travel insurance, airport lounge access, purchase protection, etc.
1. Upgrade to an Unsecured Card with the Same Lender
If you want to upgrade to an unsecured card, you do not necessarily need to apply with a new lender. Check with your current issuer to see if you can upgrade directly with them. While they may still pull a hard inquiry on your credit, you will not need to submit a new application.
As long as you have been keeping your utilization low, paying your bills every month, and have proof of income, you could potentially qualify for a better offer because you already have a good relationship with your current lender. Card issuers want to retain existing customers, so they may be more willing to negotiate and work with you.
Steps to Take
Contact your current creditor and ask them what options they have available to graduate you with an unsecured credit card. To build your case and get the best offer possible, note any positive activity, such as your on-time payments and improvements to your credit.
While each issuer will have different rules, you should also do some research beforehand to get a good sense of what other credit cards your issuer offers. Doing your due diligence will help you get a better idea of what card you want and which ones you qualify for.
2. Close Your Secured Card and Apply for a New Unsecured Credit Card
If your issuer does not let you upgrade, your other option is to close your secured card and apply for an unsecured credit card with a new lender. Before applying for a new credit card, look at what different credit card companies offer and their requirements. We recommend looking for a 0% APR credit card or a card with no annual fees to minimize the transition costs.
Avoid applying for too many credit cards in a short period. Every time you apply for a new card, the lender will pull a hard inquiry on your credit, which will cause your credit score to dip slightly. Instead, do your research and apply for one or two cards that best align with your spending habits and credit background.
For example, when I was applying for a new credit card, I looked at options from reputable lenders such as J.P. Morgan Chase, Bank of America, and Capital One. Then, I looked for cards with cashback rewards that aligned most with my current spending habits. Once I had a good idea of what card I wanted, I double-checked to ensure I met the qualifications before applying. That way, I would not get dinged multiple times by creditors or overextend myself.
Steps to Take
To cancel your secured card, call the number on the back of your card to speak to a representative about permanently closing your account. Before doing so, make sure you have already gotten approved for your new card. If you close your card before opening your new one, you may have a harder time getting approved for a new card.
Frequently Asked Questions (FAQs)
What are alternatives to closing a secured credit card?
Remember that closing a secured card is not your only option:
- You can keep your account open to prevent your credit score from falling. If you choose this option, you will need to use it every few months to keep it active. That way, your issuer doesn’t close your card due to inactivity.
- If you have been using your secured card responsibly, some issuers will let you transition to an unsecured card, so you do not need to close your account. They may also return your security deposit.
What happens when I upgrade to an unsecured credit card with my current lender?
If you are eligible to upgrade to an unsecured card with your current lender, they may still pull a hard inquiry on your credit. That will temporarily drop your credit score, though your score will recover once you start using your new card and paying your bills.
Since credit history is a crucial factor in your credit score calculation, ask your issuer if they can carry over your secured card account information to your new card. That way, the average age of your accounts will not drop when you upgrade your card.
How will closing a secured credit card impact my credit?
Closing a secured card may impact your credit history, credit utilization ratio, and credit mix. Since secured cards often get used to establish or rebuild credit, they are usually people’s first and oldest cards. If your secured card is much older than the rest of your credit cards, you may want to reconsider closing it.
The Bottom Line
If you have improved your credit and want a higher credit line, canceling your secured card and opening an unsecured credit card may be a good idea. But, before making the switch, check with your credit card issuer on your options and ways to prevent damage to your new and improved credit score.