What Are Secured Credit Cards?

If you’ve been comparing business credit cards online, there’s a decent chance you’ve come across some secured business credit cards. If you aren’t sure what “secured” means or how to compare secured cards to other business credit cards, we’re here to help.

Secured business credit cards, while common, should be a last resort for individuals and business owners. Learn exactly how these cards work and the few instances where the pros outweigh the cons before applying for a secured credit card.

What Is A Secured Credit Card?

A secured credit card is a credit card designed for individuals with poor credit or no credit where the credit limit is based on your ability to put down a security deposit. The amount you put down as a security deposit becomes the amount yo can charge to your card.

How Secured Credit Cards Work

Have you ever lent yourself money? The concept sounds kind of absurd, and in a way it is. The justification for secured credit cards is simple, actually. These cards address a very specific conundrum: banks can’t afford to extend risky borrowers a line of credit, but businesses often can’t rebuild their credit scores unless they have access to a line of credit.

Secured credit cards require you to put down a security deposit when you sign up for them. The bank will then use that security deposit to establish your credit limit. So if you put $200 down, you’ll have a $200 credit limit. If you’re lucky, the bank will apply a small multiplier to your deposit; in those cases, your $200 might buy you, say, a $240 credit limit.

Why would you do that? The security deposit removes the risk from the bank, and the cardholder is able to access rewards and perks similar to those they would get with unsecured business credit cards. In many cases, the bank will forgo checking your credit at all (or if they do, it will probably just be to confirm your identity).

More importantly, a secured business credit card becomes an easy way to improve your credit. Just be aware that banks aren’t always consistent about how they report business credit card activity. Some will report to a consumer credit bureau. Some will report to business credit bureaus. Some will report to both. And, some will report to neither. Be sure to find out before you sign up.

How Are Secured Cards Different From Unsecured Cards?

It’s simple: Secured cards require a security deposit, while unsecured cards do not. That’s because unsecured credit cards are typically issued to those who have been deemed a low risk of default, and the borrower is borrowing against his or her good credit standing. The secured credit card user typically lacks this standing and thus is required to put down a security deposit.

Not sure what your credit score is? Here are some ways to check your credit score for free.

The Pros & Cons Of Secured Credit Cards

Secured Business Credit Cards Best Practices

Now that we’ve gone over some of the best options in the secured credit card space, let’s discuss best practices for using a secured credit card.

Don’t Get A Secured Card Unless You Need One

There may be a few rare cases where this is untrue, but for the most part, a secured credit card is a good option only when unsecured credit cards are unavailable to you.

Secured business credit cards come with all the same risks of unsecured business credit cards. Business credit cards aren’t governed by the same regulations that consumer credit cards are. That means you’ll need to be on guard for surprise rate changes, floating due dates, and fast and loose terms of service.

The less scrupulous secured credit card providers know that you probably have poor credit and will try to take advantage of your lack of options.

Look For Low Or No Annual Fees

If possible, you want to select a card that has a low annual fee or no fee at all. These fees are common even with unsecured business credit cards, but they can end up being quite high. Be especially wary of annual fees over $40.

Stay Away From Higher APRs

While APRs on secured cards are often higher, if the APR is over 30 percent, it’s time to find another option. If you don’t plan on carrying a balance, this isn’t as big a deal, but you should still avoid high rates if you can. Emergencies happen, after all.

Use Your Secured Credit Card Sparingly

Secured business credit cards usually have very low credit limits, so it’s difficult to get yourself into too much trouble by using them. That said, you should use your secured card judiciously, avoiding spending more in a month than you can pay off that month to avoid accruing interest.

As for what you should spend it on, that depends on the type of card you get. Some cards return a small amount of cashback for every purchase you make. Others use a multi-tiered system that might reward telecommunication expenses at 3 points per dollar and general expenses at 1 point per dollar. You’ll get a better return on your investment if you use the card for purchases that maximize your reward points or cash back.

Upgrade From A Secured Credit Card As Soon As Possible

How long should you have a secured credit card? The answer is no longer than you need to. You should expect to have to use a secured business credit card for about a year.

If you’re able to keep up with your payments, that deposit is eventually returned to you. In some cases, you may be automatically upgraded to an unsecured card when your credit improves (but not always, so keep an eye on your credit rating).

In the event that the issuing bank doesn’t offer you a new card, don’t be afraid to ask to be promoted to an unsecured card.

When To Get A Secured Credit Card

A secured business credit card should primarily be viewed as a road back to decent credit health. Remember, however, that it isn’t necessarily the best or only path you can take. Some banks also offer high-interest, low-limit unsecured credit cards to customers with poor credit. Avoid offers that pile on the fees, and you should be back to normal unsecured credit card usage in no time.

When To Avoid A Secured Credit Card

Secured credit cards aren’t for everyone — they aren’t even for the majority of people. If you can qualify for an unsecured card, that option is much better for you. You’ll generally get better rewards, better APRs, and higher credit limits.

You should avoid a secured credit card if:

Are Secured Business Credit Cards The Only Options If You Have Bad Credit?

Not necessarily. There are other options if you have bad credit, you might just have to shop around a little longer. A lot of banks will offer high-interest unsecured credit cards with very low credit lines to businesses and individuals with poor credit. Depending on the APRs, credit limits, and fees, they may or may not offer you a better deal than you’d get with an unsecured card. Check out our best business credit cards for no credit to find an option for you.

Secured credit cards also aren’t the only way to build your credit — and, some secured cards might not even report your card history to the right credit bureaus to build the type of credit you want. We highly recommend checking out our top tips for improving your personal credit score and building your business credit score to see what other credit score tips you can apply besides getting a secured card.

If you think a secured card is the best option for your situation, some of our favorite secured business credit cards include Discover It Secured, Spark Classic, and OpenSky Secured.