If you have a low credit score or don’t have a credit history, you might struggle to qualify for a business credit card. If that’s the case, a secured business credit card can help you rehabilitate your credit.
But how do secured cards actually work, and when should you get one? We’ll walk through the mechanics of building credit with secured business cards and tell you some of the top options on the market.
What Is a Secured Credit Card?
First, let’s talk about unsecured credit cards. Unsecured credit cards are what comes to mind when most people think about credit cards—they let you borrow an unspecified amount of money (up to your credit limit) and pay it off over a variable loan term.
When you apply for an unsecured credit card, you qualify based on your creditworthiness, and you don’t have to put up any collateral against the loan.
Secured credit cards work a little differently. If you have bad or no credit, you probably won’t be able to qualify for a loan without offering something up as collateral.
Instead, you have to put up a security deposit when you open the account, typically equal to your line of credit. That security deposit isn’t used to pay off your debt—instead, it’s held by the bank in case you default. Once you close your account, you’ll get your security deposit back.
Since your security deposit usually equals your credit line, you aren’t actually getting any extra money to finance your business. You might (very reasonably) wonder why anyone would get a secured card. Well, they don’t provide financing of themselves, but they do help you build up your credit score so you can eventually qualify for a regular, unsecured credit card. Which brings us to….
How Can I Use One to Build Credit?
Your credit score is based on a number of factors, but the most important one is your payment history—whether you’ve made on-time payments in the past. If you have bad credit, you’re in a bind—you can’t establish a track record of on-time payments if you can’t qualify for a loan.
Secured credit cards are a way out of this catch-22: they let you establish a payment history at no risk to the lender. Almost anyone can qualify for a secured credit card, and with the card, you can show future lenders that you’re a responsible borrower.
So, how do you actually build up your credit score with a secured card? It’s the same principle: You make on-time payments using your secured credit card and keep a low debt-to-credit ratio. That helps to raise your FICO score so you can eventually qualify for an unsecured credit card. You can also request that the lender periodically review your account to see if you can “graduate” to a regular card.
Do I Need a Secured Credit Card?
As you can probably tell, secured credit cards have many downsides compared with regular cards. You don’t actually get a line of credit, and you might have to pay annual fees. If you can qualify for a regular credit card, you should probably go with that.
The Capital One Spark® Classic is a great average credit card for people who don’t have the best FICO scores but can still get unsecured cards. The Classic doesn’t charge annual or foreign transaction fees, and it even earns rewards: 1% cash back on every purchase you make. As far as average-credit cards go, it’s the perfect mix of no fees and cash rewards.
What Are the Best Secured Credit Cards?
Wells Fargo Business Secured Credit Card
Of the two secured credit cards we’re highlighting, the Wells Fargo Business Secured Credit Card is the only one that’s specifically a business credit card. It does come with a $25 annual fee, but you get up to 10 free employee cards and no foreign transaction fees.
You also have your choice of two rewards programs: either 1.5% cash back on every $1 spent, or a Rewards Points setup that gives you 1 point per $1 spent; 1,000 bonus points for every billing period that you spend at least $1,000; and a 10% points bonus when you redeem online (you can redeem for gift cards, merchandise, air travel, and more). Your line of credit can range from $500 to $25,000, depending on how much you deposit.
Wells Fargo reports card usage to business credit bureaus and periodically reviews your account to see if you’re eligible for an unsecured card. However, they won’t report to personal credit bureaus, so you don’t have to put your personal credit at risk. The card also offers business-specific perks like spending reports.
The Wells Fargo card’s annual fee is a pretty big strike against it, but the employee cards and accounting help are nice perks. If you’re looking for a business-specific secured card, this is a solid choice.
Discover it® Secured Card
The Discover it® Secured Card – No Annual Fee is a personal credit card, but it makes our list because it doesn’t charge annual fees. Like the Wells Fargo card, it has no foreign transaction fee, but it goes a step further and waives over-the-limit fees as well as your first late payment fee. Its minimum security deposit is lower than Wells’, at just $200.
The card also has a solid cash back rewards program—2% cash back on up to $1,000 spent per quarter on gas and restaurants and an unlimited 1% cash back elsewhere.
And after your first account anniversary, Discover matches all the cash back you’ve earned, basically raising your first-year rewards rate to 4% on gas and dining and 2% elsewhere. Discover also reviews your account every seven months to see if you qualify for an upgrade, and you can also request a review at any time.
Discover beats out the Wells Fargo card for its first-year rewards rate and lack of an annual fee, but it doesn’t offer the same business perks like employee cards or spending reports. Still, if those aren’t deal-breakers for you, it’s a great option.
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from Fundera Ledger https://www.fundera.com/blog/secured-business-credit-card