Closing a secured credit card has the potential to hurt your score. But that’s not because it’s a secured card. You run the risk of a slight drop in your score when closing any credit card because it can make your credit history seem shorter and reduce the total amount of credit you have available. And the impact usually is most significant when you close your oldest account.… read full answer
All else being equal, it’s best to keep unused accounts open. But it’s a slightly different story if you’re paying an annual fee or leaving a deposit in the custody of your card’s issuer. That’s especially true if you don’t need your credit score to be in top shape in the very near future. You don’t want to waste money on something you never use, after all, or give your card’s issuer an indefinite loan. And since secured cards typically don’t pay interest on deposits, there are far better uses for your fee and deposit money in the long run. For example, if you placed a $200 deposit on a secured credit card in 2008 and never closed your account, that $200 would still be $200. But if you invested that money in an S&P 500 index fund, you’d have more than $600 today.
Of course, you’d need to use a secured card for a while to improve your credit score enough to qualify for an unsecured card. And if you consistently pay your secured card’s bill on time, the issuer may offer to refund your security deposit. So it’s important to weigh all the different variables before deciding whether or not to close a secured credit card. And that includes how soon you plan to apply for a mortgage, auto loan or other major financial commitment for which your credit will be checked. A bit of temporary credit score damage won’t cost you if you don’t try to borrow until your score rebounds.
Here’s what you need to know about closing a secured credit card:
If you close the card, your average account age decreases and your total credit utilization increases. This may lead to a temporary credit score drop.
If you don’t close the card, it will continue to report positive information to the credit bureaus each month, even if you don’t use it and there’s no balance.
If your card charges an expensive annual fee, you may want to close it rather than pay every year for a card you’re not using.
When you close a secured credit card, you’ll get your deposit back minus any outstanding balance.
Some issuers will let you graduate to an unsecured card after consistent on-time payments. That means you’ll get your deposit back and often receive better benefits on your card.
In all, closing a secured credit card might not be the greatest idea. But most secured card users do it at some point. And you can lessen the impact with good timing.
When you cancel a credit card, your credit score could fall in the short term, depending on how old the account is and how much other credit you have. But canceling a credit card account might also benefit your credit score in the long run if you manage the rest of your finances better as a result of having one fewer account to worry about.… read full answer
Why canceling a credit card could hurt your credit score temporarily:
One way canceling a credit card account could hurt your credit score is if it reduces the amount of credit that you have available and thus increases your overall credit utilization. Keeping utilization low is key for a good credit score. So closing a high-limit credit card account will hurt your score more than closing a low-limit account, all else being equal.
Another way canceling a credit card account could hurt your credit score is if it brings down the average age of your accounts. That can make it seem like your credit history is shorter than it really is. Closing one of your oldest accounts will lead to more credit score damage than closing a newer one.
Plus, you’ll have one fewer account reporting positive information to the credit bureaus each month, assuming the credit card you cancel was in good standing.
Why canceling a credit card might still make sense:
Despite the potential for short-term credit score damage, canceling a credit card can still be the right decision. For example, if you’re paying an annual fee for a card you don’t use, and you’re not planning to apply for a mortgage or car loan in next few months, it’s probably better to close the account. Credit scores usually rebound within 3-6 months after canceling a credit card. And if you don’t plan to borrow during that time, you don’t have to worry about that drop.
But an unused credit card with no annual fee is another story. Even a credit card with zero balance still reports positive info to the credit bureaus on a monthly basis. That means it’s an asset to your credit score.
In any case, you should know all the facts before you cancel a credit card, so you can make an informed decision. We’ll summarize the key considerations below.
Here’s what happens to your credit score when you cancel a credit card:
Credit score drops: Your credit score often goes down because the average age of your open accounts decreases and your overall utilization increases (since you have less available credit).
Scores bounce back: Your credit score should rebound within 3-6 months of canceling your credit card account. Make sure to have at least one open credit card remaining and pay all your bills on time.
What happens if you don’t cancel: A credit card that is in good standing will continue to help your credit score. Even if you don’t make purchases with it, it will still report positive information to the credit bureaus each month. This is definitely worth considering if your card does not charge an annual fee.
Age matters: Closing newer accounts won’t have as much of an impact as closing older ones.
Limit matters: Closing low-limit accounts won’t do as much damage as closing high-limit ones.
When score drops matter: If you don’t need the best score possible for the 3-6 months it usually takes credit scores to bounce back after credit card cancelation, the temporary drop shouldn’t cost you anything.
Bottom Line: Avoid canceling your oldest card and your card with the highest credit limit. That will mitigate the amount of credit score damage. And if you have to close your oldest or highest-limit card, make sure you do it at a time when you don’t need your credit score to be at its best.
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