Conventional wisdom dictates that you’ll have a difficult time accessing credit — including business credit cards — after declaring a bankruptcy (or if your credit score is terrible). But as true as that can be, it doesn’t take into account the credit cards of last resort: secured business credit cards.
Below, we’ll take a look at what secured business credit cards are, where you can find them, and what they offer.
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How Is A Credit Card “Secured?”
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.
How do you get around this Catch-22? The answer is counterintuitive.
To obtain a secured credit card, you must first give the bank a sum of money that becomes your credit line. If you make a deposit of $300, the bank will extend you a credit line of $300. That deposit secures your credit card. In some cases, the issuer won’t even check your credit (or if they do, it’s only to confirm your identity).
Simple, right? But wait …
Why Wouldn’t I Just Spend The Cash Directly?
That’s the question, isn’t it? On the surface, giving a bank money to lend back to you at interest seems like a pretty bad idea. In fact, it sounds like a completely insane idea.
Luckily, it isn’t quite as bad as it sounds. 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).
Even before that happens, there are a few perks that can come with secured credit cards. In some cases, the creditor may extend you a credit line equal to your deposit, plus a percentage of your deposit. So you might deposit $300 and have a credit limit of $330.
And again, the only legitimate reason to ever use a secured card is to rebuild your credit.
Does A Secured Card Function Like Other Business Credit Cards?
Yes. In most cases, secured business cards will offer familiar perks and bonuses. You should be able to find cards that offer cash back or reward points.
And once you set it up, you can use it just like a normal business credit card.
What’s The Difference Between A Good Secured Credit Card And A Bad One?
Short answer: fees and interest rates.
The less scrupulous secured credit cards providers know that you probably have poor credit and will try to take advantage of your lack of options.
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.
While APRs on secured cards are often higher, there are secured credit cards with rates in the single digits. On the high end, however, are APRs over 30 percent. You’ll want to stay away from those. 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.
Are Secured Cards My Only Option If I Have Bad Credit?
Not necessarily. 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 and credit limits, they may or may not offer you a better deal than you’d get with an unsecured card.
Traditional lending and credit may still be hard to come by, but for almost any type of credit you can think of, there’s an alternative available for high-risk borrowers. If you do your due diligence, you can use secured credit cards to your advantage. But once your credit is rebuilt, you’ll want to ditch them for an unsecured card.
Not sure where to start with business credit cards? Check out our some of our favorites.