Building and Managing Credit with Secured Credit Cards

At O1ne Mortgage, we prioritize consumer credit and finance education. We understand that building and managing credit can be a daunting task, especially for those new to credit or looking to rebuild their credit profile. Secured credit cards can be a valuable tool in this journey. In this blog, we will explore how to effectively use secured credit cards to build credit, when to consider closing them, and the proper steps to take when closing a secured card.

How Long Does It Take to Build Credit with a Secured Card?

Secured credit cards are designed to help individuals with limited or poor credit history build or rebuild their credit. However, the timeline for building credit with a secured card can vary based on several factors:

Your Current Credit Health

If you are starting from scratch, it may take longer to establish a good credit score compared to someone who already has some positive credit history. Conversely, if you have serious derogatory marks on your credit reports, it can take even longer to see improvements, as these negative marks can hinder your efforts early on.

How You Use the Account

To build a positive credit history, it is crucial to maintain a low balance and pay your bill on time every month. Your credit utilization rate, which is the ratio of your credit card balance to your credit limit, is one of the most influential factors in your credit score. Secured credit cards typically have low credit limits due to their security deposit requirement. If you frequently max out your credit limit, it can take longer to achieve your credit-building goals.

Other Credit-Building Efforts

Using a secured credit card is just one of many ways to build credit. Expanding your efforts with other credit-building strategies, such as taking out a small loan or becoming an authorized user on someone else’s credit card, can help accelerate the process.

At a minimum, it can take several months—and sometimes longer than a year—to build up your credit score enough to qualify for better credit card options.

Should I Close a Secured Credit Card After Building Credit?

Once you have achieved your credit goal, you may be considering closing your secured credit card. However, there are a few things to consider before you proceed:

Loss of Available Credit

The more available credit you have, the better it is for your credit utilization rate. If you cancel your secured credit card and do not have significant available credit on another card, it could hurt your credit score in the short term.

Impact on Credit History

If you did not have a credit history before you opened the secured credit card, closing it would negatively impact your length of credit history. This factor incorporates how long your oldest account has been open and has an impact on credit scores.

Effect on Credit Mix

Having different types of credit can help improve your credit score. If you have a secured credit card and a student loan, for instance, closing the card will make your credit file less diverse, which can negatively affect your credit score.

Before closing the card, check with your card issuer about upgrade options. Some issuers may automatically consider you for an upgrade or conversion to an unsecured card after a certain amount of time has passed. When this happens, you will receive a refund of your deposit.

If you have not received an upgrade, reach out to your card issuer and ask about your options. If your credit card issuer will not allow you to upgrade or convert your secured card to an unsecured credit card and return your deposit—or if the card charges a hefty annual fee—it may be better to close the account, get your money back, and avoid further charges.

How to Properly Close a Secured Card

If you have decided that closing your secured credit card is the right move, here are some steps you can take to minimize the potential negative consequences:

Open a New Credit Card

If your credit is in good shape, consider opening another credit card so the loss of the available credit on the secured card will have less of an impact on your credit score. Just try to avoid applying for too many credit cards too quickly—multiple hard inquiries in a short period can damage your credit.

Pay Off Your Balance

Some credit card issuers will not close your account until there is a zero balance. Stop using the card and wait until pending transactions go through, then pay off the balance in full.

Cancel Recurring Charges

If you set up your secured credit card to pay for subscriptions or other recurring bills, change the payment method so there is no risk of another charge going through while you are in the process of canceling the account.

Redeem Your Rewards

If your secured credit card offers cash back, points, or miles, check your rewards balance and redeem what you can to avoid forfeiting that value.

Contact Your Credit Card Issuer

Depending on your card issuer, you may be able to request an account closure through your online account, over the phone, or even in person. Explain your reason for canceling the card and make sure the card issuer has the correct information for your security deposit refund. Request written confirmation once the account has been closed.

Monitor Your Credit Reports

Because credit card issuers typically only report to the credit reporting agencies once a month, it can take a while before the closure shows up on your credit report. You can check your credit report for free anytime to stay on top of the process.

Monitor Your Credit Progress Throughout the Process

Regardless of where you are on your credit journey, it is important to check your credit score and reports regularly to understand how your actions impact your overall credit health. With credit monitoring services, you will get free access to your credit score and report, making it easy to track your progress. You will also get real-time alerts when changes are made to your report, so you can spot potential issues, including identity theft, before they get out of hand.

At O1ne Mortgage, we are here to help you navigate the complexities of building and managing your credit. If you have any questions or need assistance with your mortgage needs, do not hesitate to call us at 213-732-3074. Our team of experts is ready to provide you with the best service and support to help you achieve your financial goals.