Q: Will my credit history or score go bad if I cancel my secured credit card to move to an unsecured credit card? Right now, I have a very good credit score.
A: Switching from secured to unsecured credit cards marks a milestone in your personal finance history. You've grown your credit score enough to attract the attention of a lender who's willing to take a risk on you. However, that extra risk may tax your FICO score enough to impact your life in other ways.
To answer your question, opening and closing credit card account will impact your credit score. Most lenders use the FICO model that relies on five key personal finance elements:
- Your on-time payment history
- How much you owe
- Your length of credit history
- New credit lines
- Diversity of credit styles.
Paying your bills on time has a bigger impact on your credit score than any other single element. In fact, on-time payments make as big a difference to your credit score as the combined points from the length of your credit history, your new credit, and your borrowing styles.
Making your secured credit card payment on time every month has already grown two of the most important scoring elements. You improved your on-time payment history and you rehabilitated your credit, which FICO factors into the "new credit" category. Opening a single, new, unsecured credit card will actually improve your overall score, as well.
However, canceling your secured credit card could hurt two other scoring elements. If you opened your secured credit card before any of the other accounts on your credit report, FICO's algorithm will penalize you for reducing the average age of your active accounts. If you carry a balance on any of your open accounts, canceling your secured credit card will also raise your average credit utilization. Push beyond the 30-50 percent utilization range, and your score will suffer.
Sudden changes in your credit score can influence the prices you'll pay for personal insurance, as well as the rates you'll receive if you start or refinance a home loan. You may save more money over the next two years by keeping your current card open, alongside your new, unsecured credit card. In fact, if Capital One or Citibank issued your secured card, your lender may already have plans to graduate you to an unsecured card. Contact your lender's customer service team to find out if you meet their criteria to cash out your security deposit.
Correction, Jan. 17, 2012: According to John Ulzheimer, president of consumer education at SmartCredit.com and an expert on the FICO score, the ideal percentage of credit utilization is not 30 percent, but from 1 to 10 percent.