Should I Close a Restricted Credit Card?

Evaluating whether to close a credit card, especially one perceived as “restricted,” is a common financial consideration. These cards often serve as initial steps in establishing or rebuilding credit, yet they may come with limitations or higher costs that prompt cardholders to consider closure. Understanding the potential ramifications of such a decision is important, as closing a credit account can affect one’s financial standing and credit profile. This discussion provides an overview of these implications, guiding individuals through an informed decision-making process.

What is a Restricted Credit Card?

While “restricted credit card” is not a formal industry term, consumers often use it to describe cards with specific limitations, typically for individuals with developing or challenged credit histories. One common type is a secured credit card, which requires a refundable security deposit to open the account. This deposit acts as collateral, and the credit limit is often set at or near the deposit amount. Secured cards are frequently used to establish or rebuild credit, as activity on these accounts is reported to credit bureaus.

Another category includes subprime or starter credit cards, offered to individuals with poor or limited credit histories. These cards feature lower credit limits, often ranging from $200 to $500, and can come with higher fees and interest rates, sometimes exceeding 30% APR. Unlike secured cards, many subprime cards are unsecured, meaning they do not require a security deposit but compensate for increased risk with various fees. Store-specific or limited-use cards, which restrict purchases to a particular retailer or network, also fall under this informal “restricted” label. These cards often have lower credit limits and high Annual Percentage Rates (APRs), making them easier to obtain but potentially costly if balances are carried.

Factors to Consider Before Closing

Before deciding to close a “restricted” credit card, several practical and financial factors warrant careful consideration. One significant aspect is the presence of annual fees or other recurring charges that make the card financially burdensome. Subprime credit cards, for example, often include annual fees, which can range from $29 to $99 per year, and may also have additional fees such as processing or monthly maintenance charges. If the card’s fees outweigh its utility, closing it could provide a direct financial saving.

The card’s utility and usage patterns also play a role. Cardholders should evaluate how frequently the card is used and if it still serves a practical purpose, such as a backup for small emergencies or access to specific merchant discounts. If the card has become redundant with other credit options or encourages overspending, closing it might align with personal financial objectives.

For secured credit cards, understanding the security deposit implications is important; the deposit is generally refundable upon account closure, provided the balance is paid in full. The refund process typically takes between 30 and 90 days, depending on the issuer.

Aligning the decision with broader personal financial goals is important. Closing an account might simplify financial management, reducing the number of accounts and potentially curbing the temptation to incur debt. However, these benefits should be weighed against potential negative consequences, such as those related to credit history.

Understanding the Impact on Your Credit

Closing a credit card can influence several components of a credit score, with one of the most significant impacts relating to the credit utilization ratio, the percentage of your total available credit currently used. Credit scoring models favor a utilization ratio below 30%, with lower percentages viewed more favorably. When a credit card account is closed, total available credit decreases, which can cause the utilization ratio to increase if other balances remain. For example, if an individual has $10,000 in total available credit and closes a card with a $2,000 limit, their total available credit drops to $8,000. If they maintain a $2,000 balance on other cards, their utilization instantly increases from 20% ($2,000/$10,000) to 25% ($2,000/$8,000), potentially impacting their score.

The length of credit history is another factor affected by closing an account. Credit scoring models consider the average age of all open credit accounts, and a longer credit history contributes positively to a credit score. Closing an older account, particularly if it is one of the longest-standing accounts, can shorten this average age, potentially leading to a decrease in the credit score over time. While closed accounts in good standing can remain on a credit report for up to 10 years, their contribution to the average age of accounts can diminish.

Credit mix, the diversity of different credit accounts (e.g., revolving credit cards, installment loans), is also a consideration, though it has a less significant weighting in credit scoring models compared to utilization and history length. Closing a credit card might slightly alter the variety of credit types reported, especially if it is the only revolving account. FICO scores are calculated based on five main categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and credit mix (10%). Closing a card directly affects the “amounts owed” and “length of credit history” categories, which together account for 45% of the FICO score calculation. The immediate impact on an individual’s score will vary depending on their overall credit profile, including the number of other open accounts, their age, and current utilization rates.

Strategic Alternatives to Closure

For those considering closing a “restricted” credit card, several strategic alternatives can help mitigate potential negative impacts on credit. One approach involves keeping the account open, even if used infrequently. Maintaining an older account helps preserve the length of credit history and contributes to the total available credit, which benefits the credit utilization ratio. To ensure the account remains active, a cardholder might make a small, recurring purchase on the card each month, such as a streaming service subscription, and pay it off immediately.

Another alternative is to explore upgrading or performing a product change with the existing card issuer. This involves switching the current card to a different product offered by the same bank, such as an unsecured card with better terms or benefits. A product change does not involve a new credit application or a hard inquiry on the credit report, and the original account opening date and history are preserved. This allows a cardholder to transition to a more suitable card without the adverse effects of closing an old account.

Strategic usage of the existing card can serve as a beneficial alternative to closure. Consistently using the card for small, manageable purchases and then paying the balance in full and on time each month demonstrates responsible credit management. This practice positively contributes to payment history, the most heavily weighted factor in credit scoring models. Such disciplined use can help improve credit over time, potentially leading to eligibility for more favorable credit products in the future, including the return of a security deposit for secured cards if specific criteria are met.