What is a secured credit card?

For many businesses, credit cards are an essential part of your business activities. They can help you build your credit and obtain the assets you need to properly run your business. Unfortunately, bad or non-existent credit may make it difficult to be approved for a credit card. If you are looking to establish or rebuild your credit, a secured credit card can represent a viable option.

So, what exactly is a secured credit card?
A secured credit card is one that requires a deposit or collateral up front. In most cases, this deposit must be made in cash, although some lenders will accept collateral in the form of homes, cars, or other assets.

Though a deposit may not sound ideal, a secured credit card or secured business credit card can be a valuable tool to build or repair your credit. The security deposit will ensure lenders that, despite your bad credit, you will be able to pay them back. Much like a regular credit card, you can use a secured credit card to make purchases or pay bills when cash is not an option. Your payment history will be reported to the major credit reporting agencies, and an account that remains in good standing (no late payments) over a period of time can help boost your credit score.

How much money will I need for a security deposit?
The security deposit required will vary from lender to lender, but all lenders will review your credit history, income or available capital, and perceived ability to pay on time. If you have bad credit, that may sound scary, but keep in mind that this particular type of card is specifically for individuals or businesses with bad credit.

Typically, your credit limit will be equal to, or a percent more than, the required deposit. This means that the credit card company is lowering their overall risk by securing funds ahead of time. For example, if you’re approved for a $500 credit limit, you will be required to pay a security deposit of or close to that amount.

It’s important to note that this is not the same as a prepaid credit card, in which your deposit is used against the balance you accrue. Instead, your deposit will be held separately, and you are required to pay your bill in full, without relying on the money you paid up front.

What happens to my deposit?
Your deposit is held separately, and much like a deposit for rental equipment, you will get it back, as long as you live up to your end of the bargain. In this case, that means making regular payments on your account and eventually reaching a zero balance.

When exactly you get your deposit back can vary from lender to lender, but in all circumstances, your account will need to be in good standing. With that in mind, there are common scenarios in which a secured credit card lender will return your deposit:

  • In one scenario, a deposit can be returned to the cardholder upon their decision to close the account.
  • The other, perhaps most desired scenario, is one in which the account holder successfully reduces their perceived risk by maintaining a history of on-time payments and manageable balances. In this case, the lender may decide to convert your account from a secured credit card account to an unsecured one and to return your deposit without requiring you to close the account.

What risks are associated with secured credit cards?
Though the application and approval process may be slightly different, when it comes to fees, APRs, and credit reporting, a secured credit card operates much like a regular credit card.

Secured credit cards often have yearly fees associated with them, and though rates vary drastically from lender to lender, the APR can be quite high. Missing a payment or not paying in full can quickly become costly.

Likewise, if you only pay the minimum balance, accumulated interest can make it difficult to pay your monthly bill. If you can’t pay your monthly bill, late fees will add to your total balance. From here, things can worsen quickly. If you are unable to pay your debts, you may default and find your account in collections. Of course, this will further damage your credit score.

For that reason, it’s important that you are honest about your ability to repay your debts. If you are really strapped, it would be wise to keep your total balance low and to pay it in full at the end of every billing cycle.

 

Some information on this page is adapted from content that originally appeared on Nav.com, a Venturize supporter.

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