Secured credit cards are a common first step for credit newcomers looking to build credit, and they also give people who want to repair damaged credit a way to do so.
With a secured card, you put down a security deposit upfront that’s equal to your credit limit (typically around $200), and your activity on that card is reported to the credit bureaus. For this reason, secured cards provide you with an opportunity to make consistent on-time payments and improve your credit score over time.
But eventually, you’ll want to move on from your secured card to one that doesn’t require a deposit (also known as an unsecured credit card). When this occurs, there are two basic choices: Either apply for a completely new unsecured card or simply upgrade your secured card to an unsecured card with the same issuer.
Both pathways could have a potential impact on your credit score. And no matter which one you choose, you’ll want to make sure you know how you get your deposit back.
Below, CNBC Select breaks down how to successfully upgrade from a secured credit card to an unsecured card and the two ways you can do it. Plus, we reveal the only time you should ever close your secured credit card for good.
Get a higher limit with an unsecured card
Unsecured credit cards, also called traditional credit cards, are better for long-term use than secured cards because they don’t require a deposit and they typically offer a higher line of credit. You can also earn rewards on purchases like groceries and gas, earn cash back and travel for free. Unsecured cards also come with additional perks for cardholders, such as travel insurance and purchase protection.
After using your secured card consistently and paying your bills on-time and in full, you’ll know it’s time to move on to an unsecured card when your credit score improves and you’re ready for a higher limit. To help you decide which path to take, we review both scenarios below.
Option 1: Upgrade to an unsecured card with the same issuer
Graduating to an unsecured credit card with your secured card issuer is the easiest option and won’t require you to submit a new application (though your issuer may still run a credit check). You may even be able to qualify for a stronger offer on an unsecured card by going through your current issuer versus applying through a different issuer who doesn’t already have a relationship with you. Keep in mind that card issuers want to retain you as a customer.
How to do it: Contact the provider who issued you your secured credit card and discuss your “graduated unsecured credit card” options. Be sure to make note of your on-time payment history as well as any improvement in your credit score to help build your case for the best offer.
The rules vary by issuer when seeing what credit cards you qualify for, but it doesn’t hurt to do some research beforehand to know what credit cards your issuer offers in general. For example, if you had something like the Capital One® Secured for its low deposit option, try swapping it for the Capital One® SavorOne® Cash Rewards Credit Card to earn an unlimited 3% cash back on dining and entertainment, 2% back at grocery stores and 1% back on all other purchases all without paying an annual fee.
If you had the Citi® Secured Mastercard® because of the low interest rate Citi offers, see if you can upgrade to the Citi® Diamond Preferred® Card to take advantage of zero interest on purchases for the first 12 months (after, 13.74% to 23.74% variable APR) and no annual fee.
The impact on your credit score: Even when you upgrade to an unsecured credit card with your current issuer and maintain the same line of credit, they may still perform a credit check, which results in a hard inquiry and temporarily dings your credit score. It’s still worth doing, however, and your score will recover once you start charging purchases and making on-time payments on your new card.
Since your credit history plays into your credit score calculation, avoid lowering the average age of your accounts when you upgrade. You can do this by asking your issuer if they can carry over the secured card account information, such as the opening date and account number, to your new unsecured card.
Option 2: Close your secured card and apply for a new unsecured credit card
If your secured credit card issuer doesn’t offer an upgrade option, your next best option is to apply for an unsecured card from a different issuer and close your secured card completely. Since you have to pay a security deposit in order to have a credit limit on your secured card, it’s really not worth holding onto. So once you see an increase in your credit score, you should start researching new cards.
Before you apply for a new card, shop around and take note of the credit scores required to qualify for certain cards. We recommend looking for a credit card that offers a low APR or no annual fee to make the transition easier on your finances.
How to do it: To cancel your credit card, simply call the number on the back of your secured card to speak to a representative and let them know that you would like to permanently close your account.
Before you close your account, make sure you are approved for your new credit card. If you end up closing your card before opening a new one, it makes it more difficult to be approved.
The impact on your credit score: Closing a secured card can have the same consequences on your credit score as closing any other credit card by bringing down the average age of your accounts and lowering your overall credit limit.
Because 15% of your credit score relies upon the length of time you’ve had credit, it’s important to establish a long credit history. Since secured cards are credit-building cards, they are usually the cardholder’s first and oldest credit card. If your secured card is significantly older than your new credit card, it may be worth reconsidering closing.
Although secured cards typically have low credit limits, closing one will still decrease the amount of credit you have available. This will cause your credit utilization rate to slightly decrease and ding your credit score but only temporarily. Keep in mind that experts generally recommend spending less than 30% of your credit limit and paying off your balances on time and in full each billing cycle.
Before you upgrade or close your secured credit card, have a conversation with your issuer about how to prevent any damage to your newly improved credit score. A history of consistent and on-time payments on your secured card will help your case in seeing what options the issuer has available to offer. A good payment history will also allow the issuer to refund your full security deposit, as long as there is no outstanding balance.
It’s important to consider the timing before closing your account, too. Doing so could lower your credit score temporarily, so we don’t suggest canceling your secured credit card right before you plan on applying for new credit, such as a mortgage or car loan.
Information about the Capital One® Secured, Capital One® SavorOne® Cash Rewards Credit Card, Citi® Secured Mastercard®, has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.