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Will Closing a Secured Card Hurt Your Credit?

Sandra MacGregor

Mar 29, 2022 7 min read

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    Even if you’ve only provided a small security deposit, closing a secured card can negatively affect your credit score, at least temporarily. That’s because when you close any kind of credit card (whether it be secured or unsecured), numerous factors that go into calculating your credit score can be negatively affected. For this reason, it may be worth holding on to your secured credit card, even if you’ve improved your credit score enough to move on to an unsecured card.

    How Will Closing a Secured Card Impact Your Credit?

    To understand how and why your credit score is impacted negatively when you close a secured card, it’s helpful to look at how your credit score is calculated. Credit bureaus calculate your score based on five main factors: payment history, credit utilization, credit history, credit mix and credit inquiries. The three factors impacted when you close your secured credit card are credit utilization, credit history and credit mix. 

    Credit Utilization Ratio: Credit utilization refers to how much of your available credit you’re using at any one time. So, for example, if you have three credit cards, each with credit limits of $1000 and you have a balance of $500 on each card, your total credit utilization would be $1500/$3000, which would give you a credit utilization ratio of 50%. 

    Generally, it’s advisable to keep your credit utilization rate below 30% because, if your ratio is too high, it may appear to potential lenders that you are carrying too much debt that you may not be able to pay off. 

    The more available credit you have, the easier it is to maintain a healthy credit utilization ratio. If you close your secured credit card, you would lower the credit you have available, which would in turn raise your credit utilization ratio. If your ratio increases, your credit score will decrease. Because credit utilization accounts for a large portion of your credit score (30%, making it the second biggest factor in determining your score) the effect could be significant.  

    Credit History: Credit bureaus give higher scores to those with longer credit histories because they like to see how well people manage credit over longer periods of time. If you close your secured credit card account, it could reduce the average age of your accounts and thereby negatively impact your credit history. 

    For many people, a secured card may indeed be their first credit account, so closing it could effectively wipe out a large portion of their credit history. Just keep in mind that the older the credit card, the larger the negative impact could be on your score if it’s closed.

    Credit Mix: Your credit mix refers to the different kinds of credit accounts that form your credit report, including things like student loans, credit cards and a mortgage. Credit bureaus like to see a mix of credit accounts to have a better idea of how you handle various kinds of credit. If your secured credit card is your only type of revolving credit account, closing it could hurt your score. 

    What Happens to the Security Deposit If You Close a Secured Credit Card?

    building credit

    As long as you’ve paid off your balance and have no forthcoming charges (so make sure to cancel any automatic monthly payments) and your account is in good standing, the credit card provider will return your security deposit to you in full, either via cheque or by a transfer to your bank account. If you have a balance remaining on your card, the card issuer will use your security funds to pay off the balance and then return whatever remains of your original deposit. 

    Should I Keep a Secured Credit Card After I've Built Credit?

    Whether or not you should keep a secured credit card account open will really depend on your unique credit situation and how closing a credit account would affect your overall score.

    If at all possible, it’s wise to hold onto the card because having more credit will positively impact your credit utilization ratio (even if you’re not actually using the card), as well as your credit history and credit mix. That being said, if the secured card comes with high fees or if it required a large security deposit, it may be a better option to close the account.

    When You Might Consider Cancelling a Secured Card

    closing your secured credit

    Though keeping a secured credit card account open even once you’ve graduated to an unsecured card can certainly contribute to a stronger credit report and score, there are circumstances in which a person should consider cancelling their card:

    • High APR: If you’re not managing to pay off your balance in full each month, a card with a high interest rate could significantly increase your debt load and exacerbate rather than alleviate your financial difficulties. 

    • Unable to Manage It: If you tend to spend beyond your means and find it a challenge to use a credit card responsibly, you’re better off cancelling the account.

    • Eligible for an Unsecured Card: You may consider cancelling a secured card if you’ve improved your credit score and are ready to apply for unsecured cards. However, there’s no reason you can’t hold on to a secured card (as long as there are no real downsides) while also using a traditional credit card.

    • High Fees: Many secured credit cards come with high monthly or yearly fees. If you’re not using the card enough to make up for those fees, it may be time to cancel the card.

    • Need The Security Deposit Back: If you had to provide a large security deposit and would rather use that money for some other purpose, such as depositing it in a high-interest savings account or to pay off high-interest debt, closing the account may be a good move. 

    How Do You Close a Secured Credit Card Account?

    To close a secured credit card, you will first need to ensure that you’ve paid off the balance in full or you won’t get your full security deposit back. After you’ve paid off any remaining balance, you simply phone the credit card issuer to close your account, at which point they will return your deposit, either via cheque or by transferring the funds into your bank account. As long as you don’t have an outstanding balance, your full deposit will be refunded.

    Note that some lenders may let you close the account online.

    If your account is in good standing and you’ve had the secured card for a sufficient length of time, it’s possible that your credit card provider will offer to convert your secured card to an unsecured card for which you would no longer need to supply your own money as collateral. As long as you are confident that you can manage credit well, upgrading to an unsecured card can be an attractive option because they tend to have lower interest rates and more attractive rewards programs than secured cards. Additionally, by “graduating” the same card to an unsecured card, you’ll retain the credit history you’ve built while using it. 

    Is There a Better Option Than Closing a Secured Card?

    timely payments

    Here are some alternatives to closing a secured credit card that are worth considering:

    Keep The Account Open. As previously discussed, a secured credit card can positively affect your credit utilization ratio, as well as your history and credit mix. As long as you’re not carrying a balance and the card doesn’t come with high annual fees, there’s no reason you shouldn’t consider keeping the secured card account open. In general, the longer you can keep an account that’s in good standing open, the better it will be for your overall credit health.

    Convert Your Card: As you build a strong credit file and increase your score, it’s not uncommon for credit card issuers to offer to convert an unsecured card into a regular, unsecured credit card. Often if you’re simply transitioning from one kind of credit card to another with the same provider, it doesn’t appear on your credit report as a closed account so you don’t lose out on the account history you’ve built up. You’ll also get your security deposit back. 

    Be sure you clearly understand the terms and conditions of your new account if you do convert to an unsecured card as different lenders have different policies.

    The Bottom Line

    A secured card can be an important lifeline for someone with bad credit or for those who are young or new to Canada and are looking to create a credit profile from scratch. 

    As long as you can afford to provide a security deposit and are able to use your credit card responsibly, a secured card will help improve your score. When the time comes that you’ve built up a strong credit score and are ready to move to a traditional, unsecured card, just keep in mind that it may be wise to hold on to your secured card. When you’re aware of the potential benefits and drawbacks of keeping a secured card account open, you can make an informed choice for your personal financial situation.

    Sandra MacGregor
    Sandra MacGregor
     | 
    Personal Finance Writer
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    Sandra MacGregor is a professional writer who specializes in topics such as finance, travel, health, and lifestyle. Her work has been featured in the Toronto Star, the Montreal Gazette, and the New York Times. She is a regular contributor to the Borrowell blog.

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