Starting a credit journey looks different for everyone. You can start college by opening a student card or another type of card with no credit history. Maybe you’ll take a big step and start by getting a small loan.
Another popular starting point is to open a secured credit card. As with any first line of credit, a secured credit card will set a precedent for the length of your credit history, an important component of your credit score. Let’s take a closer look at what it means to use secured credit cards and how long to keep them.
How Secured Credit Cards Work
Secured credit cards work the same way as standard credit cards with one distinct feature: security deposit. Opening a secured credit card requires a deposit, and your minimum required deposit often becomes your credit limit. This deposit serves as a guarantee for an issuer in the event of non-payment of your invoice. If the first card you open is a secured credit card, you may need to keep it open longer to increase the length of your credit history, which accounts for 15% of your FICO credit score.
How long should I keep a secure card?
As your credit score increases over time through responsible use of your secured card, you may want to upgrade to an unsecured card with more rewards and no deposit required. Even if you outgrow your secure card and stop using it, it’s still worth keeping the card open.
The age of your credit accounts is important in determining your credit score. The longer your credit history exists, the better this part of your credit score will be. Therefore, if your secured card is the oldest existing line of credit you have, it can damage your score if you close it immediately. Some secured cards have additional fees on top of their initial deposits. If you have to pay annual fees or other maintenance fees on your secure card, it is better to close it to reduce unnecessary expenses.
How Secured Cards Affect Your Credit Score
As with any credit card, opening a secured card will require an application and approval process. Once you apply, your credit score may temporarily drop following a thorough investigation of your credit report. Despite this small drop, your score will increase over time as long as you use your secured credit card responsibly.
Responsible card use includes keeping your credit usage low, paying your bill on time, and paying it in full whenever possible. Consistent and responsible practices will get you upgraded to an unsecured credit card in no time.
Why You Might Want to Keep a Secured Credit Card Open
People with limited credit histories might find themselves in a bind when it comes to deciding whether or not to keep a secured credit card open. Closing a secured card too soon, especially if it’s your first line of credit, could hurt your credit score.
An alternative to closing your secured credit card is to switch to an unsecured card from the same issuer. Upgrading to the unsecured version of your secured credit card will give you the added benefits of an unsecured card, but you will keep the same account. This avoids another serious inquiry into your report and does not affect the length of your credit history. Also, the more credit you have at your disposal, the better it will be for your credit utilization rate, another major factor in determining your credit score.
When to Switch to an Unsecured Credit Card
You can start considering upgrading to an unsecured credit card once you’ve achieved a fair or good credit score. Improving your credit score can take up to a year or more, depending on your personal spending habits. The best way to prepare for an upgrade is to pay your bills on time and in full. Keep an eye on your credit report and be sure to dispute any errors that could derail your credit-building efforts.
The bottom line
Your secured credit card is a tool that you can make work for you if you use it the right way. Use your secured credit card responsibly over time to increase your credit score. Once you’ve achieved a fair to good score, look into upgrade options offered by the same issuer if you can. Finally, consider keeping your secured credit card open, even when you’re not using it, to increase your credit history and credit utilization rate.