Closing a Secured Credit Card – Good or Bad?

Whether you already have a secured credit card, or you’re just considering getting one, the first thing you should know about this card is that it works just like a regular credit card. This means that you can use the card to buy different things and then pay off your balance.

Another important thing you should be aware of is that you need to make a security deposit upfront in order to get this card. The amount you deposit will become your credit limit. In other words, if you deposit $300, you’ll have a $300 limit on your card. The minimum and maximum amount required to get a secured credit card varies by lender and product, but it typically ranges from several hundred up to several thousand dollars.  

Advantages of a Secured Credit Card

There are two important advantages of using this type of card. First, secured credit cards are available to anyone, including people with bad or no credit. Because the cardholder cannot spend more than the amount of the security deposit and the card issuer can withdraw the money from the deposit if the cardholder defaults on the credit card balance, this card removes the risk of nonpayment for the issuer.

A word of caution, though: Despite the fact that the card issuer can hold your deposit if you fail to pay your bills on time, missed payments will still get reported to the credit bureaus. As a result, missing a payment on a secured credit card can hurt your credit score just like any other missed or late payments. 

Second, a secured credit card can be used to build or improve a credit score. However, the key to establishing or rebuilding your score with the help of this card is to use it responsibly. To help build or improve your credit, make sure you pay your balance in full every month, before the due date, and keep your credit utilization ratio as low as possible. Ideally, you should aim to keep this ratio below 10%, which can be quite challenging if you have a card with a low limit. For instance, staying below 10% on a card with a $10,000 limit may seem easy. However, 10% can be quite unrealistic on a card with a $1,000 limit. That’s because, in that case, a credit utilization ratio of 10% would mean $100 in charges. 

Depending on your credit limit, you may not be able to make any large purchases on your card. However, this card can be a stepping stone toward reaching your credit score goals. A good or excellent score could save you a lot of money if you’re planning to make a major purchase, such as buying a home or a car, in the future.  

Should You Close Your Secured Credit Card After Building or Improving Your Credit?  

Now that you know the most important advantages of using a secured credit card, you probably wonder whether you should keep it or close it as soon as you reach your credit score goals. Although it might make sense to close the card after building or rebuilding your credit, it’s not always a good idea. That’s simply because closing the card could have a few negative consequences you should be aware of.  

One of the factors that affect your credit situation is the length of credit history. Closing a secured credit card might negatively affect your credit particularly if you don’t have enough credit history to generate a credit score. Although many people wrongly assume that closing an account could impact their credit histories, closed accounts aren’t immediately removed from credit reports. In fact, these accounts remain on credit reports for up to 10 years, if positive, or 7 years, if negative. A closed account will be considered as part of your credit situation as long as it shows up on your report. 

Closing your secured credit card will also affect your credit utilization ratio. Even if you have a low credit card limit, closing that account will lower the total amount of available credit and increase your credit utilization ratio. A higher credit utilization ratio will decrease your credit score, which may prevent you from qualifying for the best mortgage products with lower interest rates.

Although closing a credit card before applying for a mortgage goes against general credit advice, you can still cancel accounts without hurting your credit score. The key is to avoid closing the highest-limit, oldest accounts and, if possible, get credit cards with higher limits. 

At North Florida Mortgage, we don’t issue any types of credit cards. However, we want to keep would-be borrowers well informed about all the financial instruments they can use in order to improve their credit situation and boost their chances of qualifying for the loans they need. For more information on how to improve your odds of getting approved for a mortgage, call us at (904) 822-7520!

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