Does closing my secured card reduce my credit score?

[CoccoBarocco]

I have a Capital One Secured Credit Card with a deposit/credit-limit of $2000. I deposited that much money into it in the hopes of bumping my score by having a lot of available credit and no balance.

I have had this card for 2+ years now, perfect payment history and low balance, and am ready to remove it or convert it to a non-secured card. Unfortunately, Capital One can't just convert it, they said they'd have to close that account and create a new, unsecured one.

Should I close this 2 year account, knowing that I need to finance a car within 1-6 months? What will the effect be on my credit score? Will my AAOA go down?

I don't necessarily plan on re-opening a non-secured account with Capital One if it doesn't help my credit. Neither do I need the cash right now (card is fully paid off), but would always be nice to have more emergency cash in my savings, and with a car purchase coming up, it's always better to have more cash on hand.

My other accounts are:

* Credit Union secured card, $1000 limit, 1 year

* Non secured CC, $800 limit, 1 year

* Retail store credit, $5500 limit, 1 year

* Retail store credit, $800 limit, 6 months

Thanks!

[Analysis]

Closed positive accounts are counted the same as open positive, except for utilization, as closed have no balance.

 

Your A A of A will go down, but because of the new account.

Edited June 9, 2014 by SBA

[shifter]

you need to build a stronger profile before you start to close cards.

 

once you open some more unsecured cards with higher limits, then you can close that one.

[cashnocredit]

you need to build a stronger profile before you start to close cards.

 

once you open some more unsecured cards with higher limits, then you can close that one.

^This

 

And SBA is right as well. Closing a card will not have any negative effect immediately outside of utilization issues which I presume are not an issue for you. But I would tend toward getting a major (VISA, MC, AMEX) card before closing the Cap1.

[mendelssohn]

Good advice above. IMO you should wait until financing the car, app for some major CCs and then you can close the secured CC.

[mendelssohn]

BTW, make sure the car dealer doesn't shotgun your credit when you finance the car. If you are going to line up your own financing through your CU, it might be a good idea to freeze your reports in advance.

[CoccoBarocco]

Fantastic, thanks for the input.

 

I'll continue using the Cap 1 card until I have a few major credit cards with significant credit line.

 

(My credit union pulled my credit recently when I asked to convert my card to non-secured, and they said they would once I have proof that I am tackling my open collections. They promised a $2500 credit line. I don't exactly know what "proof" constitutes, but I plan on tackling those open collections no matter what.)

 

Thanks again!

[dockworker]

Do you have any savings or investments? That $2k added onto the pile, pulling more compound interest is going to benefit you much greater than taking a loss of few temporary points to your credit score.

[mendelssohn]

Do you have any savings or investments? That $2k added onto the pile, pulling more compound interest is going to benefit you much greater than taking a loss of few temporary points to your credit score.

The cost of having bad credit is more than whatever return he'd get on $2K. If he already had prime credit, I'd agree with you.

[dockworker]

I asked if he already had savings/investments. If he's a consumerist living paycheck to paycheck, then no bother now, wouldn't be practical. If he has savings and investments gaining interest and/or paying out dividends that extra $2k on top of what else he has, is going to benefit him much more, not even close than closing one account.

 

Your point is moot really, because if he doesn't have any savings he's not ready to buy a house and the by the time he does have savings, his credit will go up on its own to prime rates, even if he did close this one out.

 

Also, I think our definitions of 'bad credit' differs here.

[mendelssohn]

I asked if he already had savings/investments. If he's a consumerist living paycheck to paycheck, then no bother now, wouldn't be practical. If he has savings and investments gaining interest and/or paying out dividends that extra $2k on top of what else he has, is going to benefit him much more, not even close than closing one account.

 

Your point is moot really, because if he doesn't have any savings he's not ready to buy a house and the by the time he does have savings, his credit will go up on its own to prime rates, even if he did close this one out.

 

Also, I think our definitions of 'bad credit' differs here.

If he has collections, would you consider that to be good credit?

 

$2000 compounding interest on a pile of money will have as much return as $2000 compounding interest by itself. There is no magic multiplier by adding it to a larger amount of money. Any potential gains missed over the next 6-8 months would be minimal anyway.

[CoccoBarocco]

I do have a number of collections I need to resolve.

I do have savings & investments, but not substantial (~$10k).

I have substantial disposable income as of recently though, most of which going into savings ($3k/month).

 

My goal is to save as much as possible and fix my credit for car followed by home purchases.

Car purchase within 1-6 months, depending on what I can afford with bad credit.

Home purchase ideally within 1-2 years, if that's realistic with my current credit.

 

I have 11 collection accounts, 7 of which are medical and I have started dealing with, 4 of which are other accounts (retail contract, utilities, and library fees). In total those collection accounts are worth around $3000.

[dockworker]

 

I asked if he already had savings/investments. If he's a consumerist living paycheck to paycheck, then no bother now, wouldn't be practical. If he has savings and investments gaining interest and/or paying out dividends that extra $2k on top of what else he has, is going to benefit him much more, not even close than closing one account.

 

Your point is moot really, because if he doesn't have any savings he's not ready to buy a house and the by the time he does have savings, his credit will go up on its own to prime rates, even if he did close this one out.

 

Also, I think our definitions of 'bad credit' differs here.

If he has collections, would you consider that to be good credit?

 

$2000 compounding interest on a pile of money will have as much return as $2000 compounding interest by itself. There is no magic multiplier by adding it to a larger amount of money. Any potential gains missed over the next 6-8 months would be minimal anyway.

 

 

You are joking, right? $2,000 invested at say 10% return rate for 10 years, compounded monthly. He doesn't put anything in extra monthly.. He would have $5,414.08. If he already had $10k saved up? That is $12,000 at same rate, not even putting in monthly additions.. thats nearly $32.5k roughly 6x the amount. Never mind Einstein, Buffet, Bogle and company all called this magic.

 

If OP has collections, he is nowhere near ready to purchase anything that saving the few points by keeping a card open would help him anyway,

 

I will say this once more and once more only. I asked if he already had savings. It is agreed if he has zero net worth he'll likely not put that $2k to good use so yeah, might as well keep the established account open.

 

You can start the road to credit repair and financial independence at the same time, I sure did. But you need to understand how interest and especially 'opportunity cost' works before you decide which one to prioritize over the other. Depending on your annual income, annual spend, and savings, this is a decision that could cost you tens of thousands of dollars and even more.

[CoccoBarocco]

$10,000 invested with a 10% return will yield $27,070.41 in 10 years.

$12,000 invested with a 10% return will yield $32,484.50 in 10 years.

 

$2,000 invested with a 10% return will yield 5,414.08 in 10 years.

 

The delta between $10k and $12k is exactly the return on $2k by themselves.

Investing an extra $2k on a $10k investment does not yield any more than investing the $2k by themselves.

 

So I have to agree with Lucky B*.

Whether I have existing investments/savings or not should be completely irrelevant to this specific decision.

 

But I do agree that putting an extra $2k in my investment account is a substantially better ROI over 10 years versus hoping to gain a few credit-score points by keeping the card open.

Edited June 9, 2014 by CoccoBarocco

[dockworker]

I do have a number of collections I need to resolve.

I do have savings & investments, but not substantial (~$10k).

I have substantial disposable income as of recently though, most of which going into savings ($3k/month).

 

My goal is to save as much as possible and fix my credit for car followed by home purchases.

Car purchase within 1-6 months, depending on what I can afford with bad credit.

Home purchase ideally within 1-2 years, if that's realistic with my current credit.

 

I have 11 collection accounts, 7 of which are medical and I have started dealing with, 4 of which are other accounts (retail contract, utilities, and library fees). In total those collection accounts are worth around $3000.

 

Most people here are not going to agree with me, but that's cool. Any financial adviser would tell you if you had the opportunity to get a sure fire 20% return, guaranteed, take it. That is what that $2k is (20% of your 10k savings/investments). Right now you are paying Capital One to keep your money - the opportunity cost, the lost compounded interest, is no different than you cutting a check each month and receiving nothing in return.

 

You mentioned you are buying a car. I would recommend to buy a decent car that gets good mileage and will last 10 years, and pay it in cash. Or you can do the antithesis of saving, make all that moot, and buy a 2014 whatever whatever and yeah, you'd have to worry about your credit score, but who cares because even at prime rates you're going spend a ridiculous amount of money. But you'll look cool in a pimp ride - its really what your priorities are.

 

The more you save, save, save the more of a down payment you'll have. One secured card getting closed down right now won't hurt. You did say you were ready for non-secured right? As long as you get one open and pay on time, by the time you're really ready to buy a house (enough for a down payment large enough to avoid the biggest rip-off/money sink that is known as PMI) you'll be fine, assuming you worked hard on restoring your credit in the meantime.

[dockworker]

$10,000 invested with a 10% return will yield $27,070.41 in 10 years.

$12,000 invested with a 10% return will yield $32,484.50 in 10 years.

 

$2,000 invested with a 10% return will yield 5,414.08 in 10 years.

 

The delta between $10k and $12k is exactly the return on $2k by themselves.

Investing an extra $2k on a $10k investment does not yield any more than investing the $2k by themselves.

 

So I have to agree with Lucky B*.

Whether I have existing investments/savings or not should be completely irrelevant to this specific decision.

 

But I do agree that putting an extra $2k in my investment account is a substantially better ROI over 10 years versus hoping to gain a few credit-score points by keeping the card open.

 

This assumes you don't continue to add money each and every single month and just let it sit. If you're going to do that and spend your money on whatever else, then yes, what is the point, it will not make a difference.

 

If you want a really good unbiased opinion, I recommend you reach out to /r/personalfinance on reddit.

[Occam]

 

"...invested at say 10% return rate for 10 years, compounded monthly. "

Please tell us where you are getting 10%. Or if you prefer, PM me.

 

I'm guessing it must risk free. If so, I'd even settle for 10% compounded annually.

[mendelssohn]

 

 

$10,000 invested with a 10% return will yield $27,070.41 in 10 years.

$12,000 invested with a 10% return will yield $32,484.50 in 10 years.

 

$2,000 invested with a 10% return will yield 5,414.08 in 10 years.

 

The delta between $10k and $12k is exactly the return on $2k by themselves.

Investing an extra $2k on a $10k investment does not yield any more than investing the $2k by themselves.

 

So I have to agree with Lucky B*.

Whether I have existing investments/savings or not should be completely irrelevant to this specific decision.

 

But I do agree that putting an extra $2k in my investment account is a substantially better ROI over 10 years versus hoping to gain a few credit-score points by keeping the card open.

This assumes you don't continue to add money each and every single month and just let it sit. If you're going to do that and spend your money on whatever else, then yes, what is the point, it will not make a difference.

 

If you want a really good unbiased opinion, I recommend you reach out to /r/personalfinance on reddit.

Any money added is independent of the $2000, so I have no idea why you are even throwing that into the mix.

 

Keeping the secured card open for a little while longer will help him establish some tradelines with decent limits, and then he can close the card. Closing it before an upcoming car loan app is a bad idea as well.

 

Figure out how much money he would be missing out on over 10 years by investing it 6-8 months from now. Is that difference worth it to help repair his credit?

[dockworker]

 

 

"...invested at say 10% return rate for 10 years, compounded monthly. "

Please tell us where you are getting 10%. Or if you prefer, PM me.

 

I'm guessing it must risk free. If so, I'd even settle for 10% compounded annually.

 

Nothing is guaranteed, but it's no secret. Invest in a low cost index fund that tries to match the market, not beat it. Head on over to bogleheads.org (click the 'start here' button in the upper left) for a lesson on sound investing and saving.

 

You'll learn about silly things like investing early and often, living below your means, investing in funds that emulate the current market (ever looked at the rate of S&P 500 returns each year? you'd be surpised).

 

I may not have 100k in available credit, but no worries, our net worth is more. And this is coming from someone who lived paycheck to paycheck up until very recently.

Edited June 9, 2014 by dockworker

[mizliz1011]

first of all, have you VofD your collection accounts? how long will they remain on your credit record. To not attack library fees and have money in savings is crazy. You need to work on your collection accounts and medical before anything.

 

second, you need to order reports from freecreditreport.com. you need to know your real scores and who is out there. that is why your credit is tanked..

 

third, DCU offers great auto loans not too expensive... maybe set up the $2K there as savings (or $500) you get 5% on the first $500 and they have the best auto loan rates out there and you get a free equifax score every month...

 

you have money in savings but that won't help you if your credit is tanked by collections. List your scores and dates of those delinquencies for people to give you a better view of things.

[Occam]

 

 

 

"...invested at say 10% return rate for 10 years, compounded monthly. "

Please tell us where you are getting 10%. Or if you prefer, PM me.

 

I'm guessing it must risk free. If so, I'd even settle for 10% compounded annually.

 

Nothing is guaranteed, but it's no secret. Invest in a low cost index fund that tries to match the market, not beat it. Head on over to bogleheads.org (click the 'start here' button in the upper left) for a lesson on sound investing and saving.

 

You'll learn about silly things like investing early and often, living below your means, investing in funds that emulate the current market (ever looked at the rate of S&P 500 returns each year? you'd be surpised).

 

I may not have 100k in available credit, but no worries, our net worth is more. And this is coming from someone who lived paycheck to paycheck up until very recently.

 

Thanks but I've already got plenty invested in stocks.

 

I want the 10% guaranteed return you promised so I can take advantage of 0% promotional rates and cash in on the arbitrage. I hate to just shred all those BT checks when I could be earning free money.

[BobWang]

Heck, I'd be happy with 5%

[cv91915]

9.3% on Lending Club for me, after adjustments for losses.

[cashnocredit]

9.3% on Lending Club for me, after adjustments for losses.

As a side note, there is a remarkable amount of info in LC's SEC filings correlating losses, interest rates, amounts lent, etc with FICO scores. And it is broken into small ranges. It's perhaps one of the most detailed disclosures on FICO I have run across.

[CoccoBarocco]

first of all, have you VofD your collection accounts? how long will they remain on your credit record. To not attack library fees and have money in savings is crazy. You need to work on your collection accounts and medical before anything.

 

second, you need to order reports from freecreditreport.com. you need to know your real scores and who is out there. that is why your credit is tanked..

 

third, DCU offers great auto loans not too expensive... maybe set up the $2K there as savings (or $500) you get 5% on the first $500 and they have the best auto loan rates out there and you get a free equifax score every month...

 

you have money in savings but that won't help you if your credit is tanked by collections. List your scores and dates of those delinquencies for people to give you a better view of things.

 

Fantastic feedback, thanks!!!

 

DCU? Never heard... willing to explore & try. What makes them more likely to offer a low rate loan to somebody with a number of collections on their record?

 

I was planning on starting a separate thread addressing my collections and my approach to fixing them, but here it goes instead.

 

I pulled all 3 reports last week to start working on this. I just paid for the 3 myFico scores, waiting for results. Here's my list:

• 16 total bad accounts on my credit records, a lot of which only on Experian
• 3 of those accounts are charge-offs which drop off by 12/2014, which I don't plan to touch
• 2 more charge-offs which drop off 1/2016 and 4/2017, respectively. Low priority.
• 11 active collections accounts: 7 medical, 4 various (utilities, library, retail contract). Total OC debt, ~$3400, total owed now, ~$4100

Accounts:

1. OC, Consumer, charge off, drops off 1/2016, low priority
2. OC, Consumer, charge off, drops off 4/2017, low priority
3. CA, Retail contract, in collection, ~$100, drops off 8/2017, high priority
4. CA, Utilities, in collection, ~$300, drops off 6/2017, high priority
5. CA, Library, in collection, ~$100, drops off 07/2015, medium priority
6. CA, Medical, in collection, ~$1000, drops off 09/2015, medium priority
7. CA, Medical, in collection, ~$100, drops off 01/2016, high priority
8. CA, Medical, in collection, ~$1400, drops off 04/2018, high priority
9. CA, Medical, in collection, less than $100, drops off 6/2018, high priority
10. CA, Medical, in collection, ~$400, drops off 06/2018, high priority
11. CA, Medical, in collection, less than $100, drops off 07/2018, high priority
12. CA, Utilities, in collection, ~$200, drops off 06/2018, high priority
13. CA, Medical, in collection, ~$100, drops off 10/2018, high priority

Items 5 through 11 (seven items) are all owned by the same CA. I have a thread for those in the Medical Bills forum, but basically since they're all basically high priority, I plan on following the HIPAA letter program immediately and paying them all.

 

The non-medical high priority items I have to figure out how to deal with.

 

Thanks for any feedback.