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Secured vs. Unsecured Credit Cards: What’s the Difference?

Anisha Sekar

Anisha Sekar

Contributor at Fundera
Anisha Sekar is a personal finance expert who led NerdWallet's credit and debit card business. She has written for U.S. News and Marketwatch, and featured in Time, NPR's Marketplace, CNN, and more. She currently writes about everything from getting out of debt, to saving for retirement, to finding affordable health insurance.
Anisha Sekar
Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone.

If you’re a small business owner with less-than-stellar credit, you might be considering a secured business credit card. Secured credit cards are easier to qualify for than regular credit cards, and they help raise your credit score so you can eventually get approved for more traditional financing.

We’ll break down the differences between secured vs. unsecured credit cards to help you decide which is best for your company, plus look at one alternative to secured credit cards. Then, if a secured credit card sounds like just what you and your business need, we’ll help you sift through some of the top secured credit card options out there.

What Is a Secured Credit Card?

Secured credit cards are cards that require security deposits to open the account. The deposit required will be equal to or less than the credit limit. For example, if you put down a $300 deposit, your spending limit on the credit card will be $300 or slightly higher.

These cards are specifically for people with lower credit scores or a thin credit history. The purpose of the deposit is to mitigate any risk a card issuer takes on by offering the credit card to the cardholder.

Each month, you will receive a credit card statement, just like with an unsecured credit card. If you miss a payment, the card issuer will dip into your deposit to pay off the balance. This prevents you from defaulting or falling into further debt. But if you pay at least your minimum balance, the card issuer will report your account status favorably to the major credit bureaus—Experian, TransUnion, and Equifax. With responsible spending, you’ll be able to use a secured credit card to improve your credit score in order to eventually be able to access an unsecured credit card.

All in all, although keeping your cash tied up in a security deposit isn’t ideal, secured credit cards provide a one-way ticket to improving your personal credit and eventually qualifying for an unsecured credit card that won’t require a security deposit.

secured vs. unsecured credit card

What Is an Unsecured Credit Card?

Put simply, unsecured credit cards are generally what you think of when you think of credit cards—a credit limit that you can spend up to and make at least a minimum payment on each month. Unfortunately, business owners with personal credit scores below 580 often have trouble qualifying for an unsecured credit card. As such, they turn to a secured credit card.

Issuers of unsecured credit cards often report payments to the major credit bureaus as well. However, since there’s no deposit required for an unsecured credit card, it’s easier to fall into debt.

Pros and Cons of Secured Credit Cards

If you’re rebuilding your credit, you might jump at the chance to apply for a secured credit card. But there are some disadvantages you should be aware of, and you should take precaution in how you use these credit cards.

Here are the pros and cons of secured credit cards:

Pros of Secured Credit Cards

  • One of the few financing options for business owners with bad credit
  • Possible to get your full deposit back if you pay all your bills on time
  • Improve your credit with responsible use, letting you graduate to an unsecured card
  • Might offer rewards point or cash back

Cons of Secured Credit Cards

  • Tend to have higher interest rates than unsecured cards
  • Might have an annual fee
  • Require a personal guarantee, just like unsecured cards
  • Deposit requirement ties up free cash

secured vs. unsecured credit card

Secured or Unsecured Credit Card: Which Is Better for My Business?

If your personal credit is less than ideal, you might need to use a secured credit card to beef it up. By building a history of on-time payments and responsible use, you can boost your FICO score to the point where a personal guarantee can get you an unsecured business credit card.

Whether you get a secured or unsecured business credit card, you almost certainly need to make a personal guarantee. This means that you personally are on the hook for unpaid debts, even if your business is a corporation or limited liability company. The upside of personal guarantees is that you can qualify based on your own credit history, which is handy for businesses that can’t provide years of revenue, profit, and on-time payment records.

If you can, you should go straight to unsecured credit cards. Not only will you actually be able to borrow funds for your business without a deposit, but you’ll probably save on fees and earn better rewards.

Think of secured cards as a stepping stone to a regular card. If you go the secured card route, make sure you use the card wisely. We suggest charging only a few small expenses on the card and paying off your bill in full each month. This will help you maximize your credit building potential and qualify as quickly as possible for a regular credit card.

Top Secured Business Credit Cards

Here are the best secured credit cards for business owners:

No Annual Fee With a Flexible Security Deposit: Capital One Secured Mastercard

If you’re searching for a secured credit card that offers a flexible security deposit and no annual fees, then you’re looking for the Capital One Secured Mastercard. Unlike many secured cards that will require you to put down at least 90%—if not all—of your credit line’s value in a security deposit, the Capital One Secured Mastercard will allow you to put down a security deposit that’s a smaller fraction of your credit line’s worth.

Depending on your creditworthiness, you’ll be able to provide a security deposit that’s as small as 25% of your credit line with the Capital One Secured Mastercard. Plus, if you can’t pay all of your security deposit upfront, you’ll be able to pay it in installments, as long as you’ve paid the full amount within 80 days.

With the Capital One Secured Mastercard, you’ll be able to access flexibility that’s rare for a secured credit card.

High Credit Limit: Wells Fargo Business Secured Credit Card

Wells Fargo offers a secured credit card specifically designed just for business use—the Wells Fargo Business Secured Credit Card. There’s a $25 fee on this card, which is reasonably low for a credit building product. The credit limit will be equal to the amount of money you deposit, but you can go almost as small or as large as you need for your company’s spending purposes. Credit limits start at $500 and go up to $25,000.

Get up to 10 cards for use by you, your business partners, and your employees. Many secured credit cards don’t offer up cash rewards, but this one does. You can earn 1x rewards points for every purchase charged on the card, or 1.5% cash back. When you spend $1,000 or more in one month, you will receive 1,000 bonus points.

The interest rate on the Wells Fargo Business Secured Credit Card is 11.90%, which is relatively low among secured credit cards. There are also no foreign transaction fees. Wells Fargo will periodically review your account to see if you’re eligible for an unsecured credit card.

Best Business-Specific Card: BBVA Compass Secured Visa Business Credit Card

The BBVA Secured Business Credit Card is another of the few secured credit cards out there that are meant for corporate use. Its $40 annual fee is waived the first year, and it offers free employee cards. It’s also one of the few secured credit cards that offer business-specific rewards points, letting you earn 3x points at office supply stores and 2x points at restaurants and gas stations. You earn 1x points for all other purchases. The minimum security deposit is $500, and your credit line is 90% of the deposit.

The annual fee and relative clunkiness of the CompassPoints rewards program compared to cash back are marks against the BBVA card. Plus, BBVA doesn’t report business credit card usage to the commercial credit bureaus, so you can’t use this card to build business credit. However, using a business-specific card has its perks—like 3x points and employee cards, for example.

No Annual Fee With Rewards: Discover it® Secured Card

The Discover it® Secured Card—No Annual Fee is one of the few secured credit cards that doesn’t charge annual fees. It goes one step further by waiving foreign transaction fees and over-the-limit fees, as well as your first late payment fee. Its minimum deposit is an affordable $200.

Even better, the card offers  2% cash back on up to $1,000 spent per quarter on gas and restaurants and an unlimited 1% cash back elsewhere. After your first account anniversary, Discover will even match all the cash back you’ve earned. This means that for the first 12 months of card membership, you’re earning 4% back on gas and dining and 2% elsewhere—not too shabby for a secured credit card.

Discover also makes it easy to graduate to unsecured credit cards. Every seven months, the bank automatically reviews your account to see if your on-time payments qualify you for an upgrade.

Keep in mind that this Discover card is a personal credit card, not a business one. This means no business-friendly perks like employee cards or accounting help—and if you fail to separate personal and business expenses on the card, you’re in for a headache come April 15th. Still, with its rewards and no annual fee, the Discover it is a great option for rehabbing your credit.

Bento for Business: Best Alternative to Secured Credit Cards

The Bento for Business prepaid card can help you get a lot done and serves as a good alternative to a secured credit card. With a prepaid card, there’s a specific amount of money pre-loaded on the card and ready to use. The issuer doesn’t report card usage to the credit bureaus. Once you spend all the money on the card, future transactions will be declined.

Bento is a great prepaid card option, since it allows you to use your own prepaid capital toward purchases. Bento lets you easily set spending limits, track card activity, and integrate expense data into your company’s bookkeeping software. And it provides you with as many cards as you need for your business. So, if you need to monitor employee spending easily, but want to avoid secured business credit card, you can use this prepaid card for daily purchases.

Although Bento won’t help you build credit history, it does serve as a great day-to-day card for typical business expenses alongside a secured credit card when you’re ready for one. And together, you’ll have a way to build a solid credit history over time while having multiple ways to make purchases for your company.

Secured Credit Cards: Better Credit and Better Financing Are Ahead

Every small business owner hopes to have the best financing options and opportunities for growth. When you start out with struggling credit, it might feel like many doors are closed. One product that you can almost certainly opt for is a secured credit card. With responsible usage, secured credit cards can help you improve your credit and qualify for more lucrative financing. In addition, many secured credit cards offer rewards points, no annual fee, and other perks. The road to better credit might be faster than you expect.

 

Anisha Sekar

Anisha Sekar

Contributor at Fundera
Anisha Sekar is a personal finance expert who led NerdWallet's credit and debit card business. She has written for U.S. News and Marketwatch, and featured in Time, NPR's Marketplace, CNN, and more. She currently writes about everything from getting out of debt, to saving for retirement, to finding affordable health insurance.
Anisha Sekar

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