Should You Keep Your Old Secured Credit Card?

Secured cards are great for building credit. But after you've improved your credit score, do you still need the card?

Woman holding a credit card and smiling.

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Secured credit cards are a really important credit-building tool. When you can’t get approved for a standard credit card because your credit score isn’t very good or because you haven’t had time to build credit history, a secured card could be your first card.

By using a secured card and paying it responsibly, you can develop a positive payment history that leads to a good credit score and one day allows you to take your pick of the best credit cards.

But what happens once you’ve developed that positive credit history? Should you keep your old secured card open or is it OK to close the card? The right choice will depend on your situation, but there are a six key questions to ask yourself before you make the decision.

1. How much of your money is tied up with the secured card?

Secured cards require you to deposit collateral in a special account with the creditor. Typically the amount you deposit is equal to your line of credit. So a card with a $500 line of credit would require a $500 deposit.

If you have several hundred dollars tied up with the secured card, closing it to get the cash back often makes sense -- especially if you need the money for some other purpose, such as creating an emergency fund. The more you have tied up with the card, the stronger the argument that you should close out the account and recover your funds.

2. How much will closing the secured card affect your credit?

While getting back your deposited collateral is one of the biggest reasons to close a secured card, preserving your credit score is the biggest reason to keep the card open.

If you have a secured card open but don’t charge anything on it, the card helps your credit utilization ratio. Credit utilization ratio is the amount of credit used vs. credit available. Plus for many borrowers, their secured card is one of their first credit cards on their credit report, which means it makes the account history longer.  A low credit utilization ratio and a long credit history both have a big positive impact on your credit score.

Unfortunately, when you close out your account and your credit history and utilization ratio both change for the worse, your credit score could take a tumble.

3. Does the secured card have an annual fee?

Some secured cards don’t just cost you money by tying up your collateral -- some also charge an annual fee.

If you’re paying a fee for your card, this is a really strong argument in favor of closing it. After all, it makes no sense to pay a fee for the rest of your life just to be able to keep an old account on your credit history.

4. Would the card issuer be willing to convert the card to an unsecured one?

Some secured card issuers want to keep their cardholders as customers even when those customers get better credit. In some cases, card issuers conduct an automatic review of your account to see if you can upgrade to an unsecured card. In other cases, your card issuer may be willing to convert the card to unsecured if you ask.

If you’re able to convert the account to an unsecured one, this is often the best approach -- as long as the card doesn’t charge a big annual fee. That way you get your deposited funds back but you don’t have to suffer the consequences of closing an account.

5. Do you have other open credit accounts with free credit?

If you have no other open credit cards, you obviously don’t want to close your secured card because then you’d lose all the credit available to you. Not only would this mean you couldn’t charge emergency expenses if you need to, but you’d also lose your only chance to build a positive credit card payment history

But if you have other credit cards that are nearly as old as your secured card, your credit score won’t take as much of a hit because of the age of the cards you’re keeping. Likewise, if you’ve got other cards with lots of available credit, you won’t have to worry that closing your secured card will make your credit utilization ratio much too high.

6. Are you planning on taking out any big loans in the near future?

Mortgages and car loans are big loans that are paid off over long time periods. If you do anything to hurt your credit score, even a little bit, you could end up facing a higher interest rate on loans you’re paying off for years or even for decades in the case of a mortgage.

You can’t afford to take chances and accidentally hurt your credit before you take out one of these large loans -- so keep your secured card open until you’ve closed on your new purchases.

If you aren’t planning on borrowing much money -- or any money -- for a while, it may be an ideal time to close your old secured card and just focus on building a long and positive payment history with the cards you still have.

Now you can decide if you should keep your secured card open

By answering these questions, you can get a good idea of the pros and cons of keeping the secured card. Based on your assessment of the cost and benefits of closing the account vs. maintaining it, you can decide which course of action is best for you.

The Motley Fool owns and recommends MasterCard and Visa, and recommends American Express. We’re firm believers in the Golden Rule. If we wouldn’t recommend an offer to a close family member, we wouldn’t recommend it on The Ascent either. Our number one goal is helping people find the best offers to improve their finances. That is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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