If you are new to credit, or are working to recover from a poor credit history, then you have probably taken out a secured credit card.
Secured credit cards are one of the most common forms of credit used to improve your rating, and this is why so many people will apply for a secured credit card during their lifetime.
Secured credit cards are considered a safer step into credit, and it is a lot more common for you to be accepted for one of these cards if your credit history is bad or non-existent.
But, once your credit rating has improved, then there is a pretty good chance that you will be considering closing your credit card.
But, as is often the case with credit, poor timing can actually damage your rating. So, if you are considering closing your secured credit card, this isn’t a decision that you should take lightly.
In this guide, we’ll be taking a look at whether, or not, you should close your secured credit card, and lots more. So to find out, keep on reading. We also have a guide on how to do so.
What is a Secured Credit Card?
Well, before we go any further, let’s quickly establish exactly what a secured credit card is. As we have said, a secured credit card is regularly viewed as a safer form of credit, and this is true for both the lender and the borrower.
That is because, unlike unsecured credit cards, secured cards come with collateral. So, both the lender and the borrower are both invested in what happens with that credit card.
With an unsecured credit card, it can be really easy to run up debts without even realizing it. That is because you, as the borrower, do not have any money invested in the process.
The only thing that will be affected is your credit rating. But, with a secured credit card, you are required to put down collateral in order to be accepted.
So, the bank has security if you were to not make any repayments, and there is also the risk of you losing your money if you fail to do this too.
For this reason, you are more likely to be accepted for a secured credit card than an unsecured one. This is why secured credit cards are preferable to those who are new to credit, and those with a poor credit history.
Should I Close my Secured Credit Card?
If you took out your secured credit card with the sole intention of improving your credit rating, then it is likely that you will want to close that account as soon as possible.
In order to have a good credit rating, you have to use credit, but despite this, a lot of people do not like to have open credit accounts. So, is closing your secured credit card a good idea?
Well, this decision is a bit of a double-edged sword. There are benefits of keeping your secured credit account open, and there are also benefits to closing it too. So, the correct decision will ultimately come down to your own situation.
Having a secured credit card, even if you do not actively use it, is a good thing because it opens the amount of credit open to you. Most credit bureaus view this as a good thing, and having a higher level of credit available will often increase your credit rating.
But, it will also make it more tempting to use that credit, and if you fail to repay it, then this will harm your credit score.
Likewise, when you close your credit card, your credit rating will take a temporary hit, and it will often decrease significantly for a while before it bounces back. This will make borrowing money in the near future a lot more difficult.
So, ultimately, whether, or not, you should close your credit card will depend on if you plan on taking out any more credit. If you are likely to need to borrow more money in the near future, then closing your secured credit card likely isn’t a good idea.
Does Closing a Secured Card Affect Credit?
Even if you are closing your secured credit card for good reasons, it will likely have a negative impact on your credit rating. This is because closing any credit account will negatively impact your credit. At least, for a short amount of time.
But don’t worry, your credit score will usually bounce back. So, let’s take a look at why this is.
When you have open credit accounts, credit bureaus will add the total amount of credit available to you up across all your accounts. The higher the amount of available credit, the better your credit rating will be.
This is because credit bureaus will compare the credit you have available with the credit you are currently using to come up with your score.
If you close your account, the amount of credit that you have available will decrease. This is why closing credit accounts affects those who are new to credit most harshly.
If the only credit account you have is your secured one, and you then close it, then your available credit will reduce to zero, which will leave a lasting impact on your credit rating.
If you do not plan on using credit again, then this isn’t necessarily a bad thing. But, it will make taking out new credit accounts in the future a lot more difficult.
In short, if you are considering closing your secured credit card, then this isn’t a decision that you should make in haste. This is because closing your credit card will have an immediate impact on your credit rating.
Even if you are closing it for good reasons. So, before you make the decision to close your secured credit card, you should think about whether you plan on taking out any more credit in the future.
If you do, then closing your secured credit card is a bad idea, because it will make taking out further credit very difficult.
Next read this guide on if closing cards hurts credit.