Responsible use of a secured credit card can have a positive effect on your credit score, but at some point, you may feel ready to transition away from it in favor of an unsecured card.
Closing a secured card too soon could lower your credit score by decreasing average account age and credit utilization ratio. Here are some guidelines to help determine how long it is wise to hold onto one.
Building Credit
Secured cards offer an effective solution for building or rebuilding credit. These cards require a security deposit, which serves as insurance against nonpayment of bills, while reporting your monthly payment history directly to credit bureaus. Responsible use can boost your score over time; paying at least the minimum amount and never exceeding your limit will help your score and add diversity to your mix.
Secured credit cards differ from unsecured cards in that they require higher scores to open; secured cards are designed specifically to help those without enough of a history to qualify for regular cards, such as young adults just starting to establish credit, people who have suffered past financial missteps and adult children lacking their own credit in their names. They may also serve as a first step toward moving onto an unsecured card later when proven responsible credit behavior has been demonstrated.
Secured cards function similarly to regular credit cards, with one key exception: they require a refundable deposit which usually determines your credit limit. The deposit mitigates card issuer risk in case you default on payments, making their decision easier; plus it helps determine how much of your limit you can spend each month as it’s important not to exceed 35% of available credit.
Most credit card companies provide secured cards. To increase your chances of approval, apply for one that has low or no annual fees and offers a good credit limit based on the size of your security deposit. Also ensure your card reports monthly activity to all three major consumer credit bureaus to help build an excellent payment history that makes up approximately 35% of your score.
In certain circumstances, your card issuer may allow you to transition from a secured credit card to an unsecured one and return your security deposit in the process. This typically happens after a certain amount of time varies by card company; Navy Federal’s nRewards Secured Card offers this opportunity after six months of on-time payments.
Boosting Your Credit Score
Secured credit cards can help build your credit, but the timeframe depends on what kind of history you have – people with no or poor credit may take longer to see results, while usage will impact both how much is charged each month as well as payment status each month.
Secured cards differ from prepaid credit cards in that they report your payment history directly to credit bureaus, like any unsecured card would. By using them responsibly and making on-time payments each month, your secured card should help build or restore your credit score – in fact it accounts for roughly 35% of it!
Once you begin using a secured card for the first time, its impact may take two months or so before being noticeable in your credit report – more time may pass if there are already issues such as late payments on it.
When using a secured card, it is ideal to maintain as low a balance as possible. This is due to your credit utilization ratio being approximately 30% of your overall score; carrying an outstanding balance will negatively affect this aspect and potentially lower it further, so try paying off your monthly balance in full each month.
Before applying for a secured card, it’s also important to consider all the other components that contribute to your score, such as your credit mix (the various forms of credit you use) and age – these factors could have more of an effect than using just the secured card itself.
After using a secured card for several months, it may be time to apply for an upgrade to an unsecured one. Assuming you have made responsible purchases and paid your monthly balances in full each month, an unsecured card could qualify for you with a minimum credit score of at least 630; it would be wise to check your score first to avoid overextending yourself financially and risk overextending yourself further.
Graduating to an Unsecured Card
After several months or a year of responsible use, you may become eligible to convert your secured card into an unsecured one – this marks a huge accomplishment and indicates that your credit has improved enough that traditional credit cards no longer require deposits as back-up.
Some card issuers automatically assess your account to see if you qualify for an upgrade; other require that you submit an application independently. Either way, if your request is approved you’ll keep using your original credit card but no longer need to pay security deposits; plus your initial deposit will be returned!
Remind yourself that even as you move toward an unsecured card, other debts and financial obligations need to be managed properly. Adhering to payments such as mortgages and cars will ensure you’re on a solid financial footing.
Selecting a suitable card is of equal importance, too. Beware of secured cards with high fees or above-average APRs that do not report back to credit bureaus; instead look for cards offering good credit-building features, like low or no annual fees and cash-back rewards.
Once you have secured an unsecured credit card, it’s best to leave it open unless using it to cover an emergency expense. Closing it could damage your credit score significantly while having multiple cards can provide your wallet with more flexibility for long-term financial success.
Dependent upon your specific needs, you may opt to stick with your original card issuer or apply for an unsecured credit card from another issuer. Staying with one issuer could mean lower fees and no hard inquiries on your credit report, while remaining loyal for an extended period will build your overall credit history. Keep in mind that unsecured cards tend to offer higher limits and additional perks like travel and purchase protection.
Closing Your Card
Once you’ve shown yourself to be an responsible credit card user, the next step may be available to you. Depending on the upgrade options provided by your card issuer, some secured cards automatically convert to an unsecured one once you’ve made enough on-time payments. Most accounts require you to request changes; either way, your deposit should be returned once you close out your account with no outstanding balances. If you are considering closing a secured card before qualifying for an unsecured one, know that doing so may temporarily decrease your credit score. That is due to having less accounts with an average age and lower overall limits across your file.
Closing a secured credit card should only ever be done as an absolute last resort, especially if there’s still an outstanding balance. After all, its primary function is to help build or rebuild your credit history – closing it prematurely will only delay seeing positive changes to your score and will impact its length – two key components in calculating it.
If you decide to close your card, make sure you’ve paid all outstanding charges before reaching out to its issuer. Some may allow online cancellation while others require you to visit an actual branch and talk directly with someone there. Be ready to explain how responsible a cardholder you have been, as well as ask what their recommended course of action would be going forward.