Closing a secured-card account

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Dear Debt Adviser,
I opened a secured credit card five years ago and since have obtained other conventional credit cards and now have a very good FICO score of 700 plus. I want to withdraw the money from the secured credit now ($500), but doing so will close the account. Will that negatively affect my credit score?
— Liza

Dear Liza:
Your last name should be Doolittle! Just like Eliza in the Broadway show “Pygmalion,” you have transformed yourself into a new person, but without the help of Professor Henry Higgins.

Congratulations for sticking with the secured card for five years and then going on to build a great credit history. You are now at the point where you can make decisions regarding closing the account that started your transformation. Closing your secured card account may not affect your credit score as much as one might think.

Let me start by first bringing my readers who may not be familiar with a “secured card” up to speed. For many, the initial establishing or reestablishing of credit can seem an impossible proposition. If you have no credit or bad credit, who will give you a credit card so you can begin to improve your record and score?

The answer is a secured-card lender. Here’s how they work. You find an issuer who has reasonable terms, fill out an application and send in a deposit to an account at the issuer’s bank that’s insured by the Federal Deposit Insurance Corp. The account serves as collateral for your charges. Typically, you get to charge up to the limit of the account, although some allow more. As you use the card and make your payments on time, positive data goes into your credit report. No one knows the card is secured and Fair Isaac Corp. — the creator of the FICO score — doesn’t care.

Now to your question. The popular notion is that closing an account affects your score. Well, the answer is maybe and maybe not! It is true that 15 percent of your FICO credit score comes from the length of time you have had credit reported on your credit bureau file. Negative items are typically reported for seven years, while good stuff, like your secured-card history, can be reported for a much longer time. So closing this card won’t wipe out your great history. As you continue to add positive history from other sources, you will continue to improve or solidify your score.

One other aspect of credit scores that should be considered when closing a credit card account is the “credit available” to “credit used” ratio. If closing an account will significantly increase your ratio, particularly if it brings the amount of credit used to more than 50 percent of the amount of the credit line available, a person might want to reconsider closing the account. In your case, however, with a $500 secured card limit, this shouldn’t be a problem.

During the credit crunch we are experiencing now, creditors are much more concerned about risk and therefore are more particular when choosing whom they are willing to lend their money to. Most creditors have more stringent lending policies than in the recent past. The days of qualifying for a loan or a line of credit with little more than your signature are long gone.

I mention the credit crunch to reaffirm to you that your hard work to establish a good credit history is something to be proud of, and your timing is excellent. Only those with what is considered good or excellent credit can hope to obtain the credit that they want or need.

To ensure that you and my readers stay in the best credit standing possible during the crunch, please consider the following:

How to stay in good credit standing
  • Keep your credit card balances well below 50 percent of your credit limits.
  • Pay all bills on time and bring any past due accounts current as quickly as possible.
  • Review your credit reports at least annually at (I just got mine for 2009) and dispute any inaccurate information.
  • Open new credit accounts only if needed.
  • Shop for new credit in a focused time period of no more than 45 days, ideally less.

Good luck!