If you’ve been comparing business credit cards online, there’s a decent chance you’ve come across some secured 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.
Read on for everything you need to know about secured business credit cards.
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You Won’t Want 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 do offer rewards similar to many of their unsecured counterparts. At the same time, your selection of cards will be limited. Not only that, but your interest rates will probably be higher than they would be with a similar unsecured card.
What Makes A Card Secured?
Have you ever lent yourself money? The concept sounds kind of absurd, and in a way it is.
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.
Why would you do that? If it helps, you can think of it as a strategic money transfer between your different accounts that maximizes the efficiency of your money.
How Secured Cards Can Help
Secured credit cards are a way for business owners who have recently filed bankruptcies to access revolving lines of credit. Many of these individuals may find it difficult to be approved for an unsecured business credit card.
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.
More importantly, a secured business credit card becomes an easy way to repair 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. Some will report to neither. Be sure to find out before you sign up.
How You Should Use A Secured Credit Card
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.
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.
What Are The Drawbacks?
For starters, 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.
Secured credit cards come with a few additional risks, however. The big one is higher interest rates. If you pay off your card’s balance every month, you don’t have to give interest rates too much thought (just watch out for that aforementioned floating due date). That said, if you can avoid getting charged usurous fees if you miss a payment, you should. With a little research, you should be able to get a secured credit card with a reasonable APR.
The other things to look out for are miscellaneous fees. It’s not unusual for even unsecured business credit cards to carry annual fees, but secured business cards can come with even more charges, including application fees, maintenance fees, and processing fees. Avoid as many of these as you can.
How Long Should You Have A Secured Business Credit Card?
The answer is, of course, no longer than you need to. You should expect to have to use a secured business credit card for about a year. After that, a bank will usually offer you an unsecured credit card.
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.
At that point, you should have your security deposit returned to you. Unfortunately, you don’t usually earn interest on your deposit.
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.
Looking for a good unsecured card instead? Check out our 2018 business credit card guide.