What is a secured credit card?
What is a secured credit card? A secured credit card is a type of credit card that appears like other credit cards. It might be a Visa, Discover, or Mastercard and can be used wherever those types of cards are accepted. However, a credit card that is secured requires you to deposit money with the company that issues the card. Your credit limit will normally be the amount that you have deposited unless you are able to find a secured credit card with low deposit and a higher limit. Your deposit will secure against the purchases that you make.
When you purchase items with secured credit cards, you will be charged interest on balances that you carry over. You will also need to make at least the minimum monthly required payments. These types of cards are available to both consumers and businesses that have poor credit and can help them to build their credit scores.
The Federal Reserve reports that secured cards make up less than 1 percent of the credit card market. They are a niche product that is generally used by people or businesses that are wanting to build credit or those who are wanting to repair damaged credit.
Secured cards might be a good option for new companies that have not had time to build credit histories or for businesses and business owners that have problematic credit histories. If you use a secured card responsibly, you can build your score and then talk to the institution about letting your business switch to an unsecured credit card with more favorable terms. Business owners who want to get secured prepaid credit cards or secured debit cards should read secured credit card reviews to find the best deals.
Who uses secured credit cards and why?
A credit card that is secured may be used by consumers and businesses. For example, a consumer who is young and has little or no credit history might get a secured card and use it to build his or her credit. If he or she uses it responsibly, the person can then start establishing a credit history so that he or she can move to a regular consumer credit card.
A business might use a secured card when it is newly opened. Some new companies have trouble qualifying for traditional business credit cards when they have not been open for very long. The business could then use the secured card to help to build its credit history so that it might have more access to financing sources in the future.
Pros and cons of secured credit cards
There are several advantages and disadvantages to a secured card. The benefits of a secured card include the following:
- You can be approved for a secured card even if you can’t be approved for a traditional credit card;
- Secured card companies report to credit bureaus, so the cards can help to build your credit;
- Your deposit will be used if you default, so you won’t have to worry about debt collectors; and
- You may be able to earn interest on the money that you deposit.
The disadvantages of a secured card include the following:
- You are required to put down the deposit;
- You will pay fees in addition to the deposit that you make; and
- The interest rate will likely be much higher than for other credit cards.
Business secured cards might still be a good option if your company is new, or if your credit is poor and you want to improve your credit score.
How secured credit cards compare with traditional payment alternatives
A credit card that is secured has several differences as compared to traditional payment alternatives such as cash or checks. Unlike cash and checks, the charges that you make on a secured card add to your debt balance rather than being subtracted from the deposit that you have made.
A secured credit card may be more secure than using cash or checks, however. If you use a petty cash system in your business, your employees might be tempted to take small sums that you haven’t authorized. Similarly, checks may be targeted for fraud by employees. With a secured card, you can see the expenditures that your employees have made when you review your credit card statement at the end of the month.
Features or benefits to look for in a secured credit card
If you are wanting to find one of the best secured credit cards or secured debit cards, you should start by reading secured credit card reviews. There are several features or benefits that you should look for. Some business secured cards charge lower interest rates than others. Others offer better rewards. Some cards for businesses that are secured offer higher secured credit limits of as much as $100,000.
Business owners might also want to look for cards that offer an introductory bonus. Others might prefer to choose cards that offer credit limits above their deposits. Finally, good features for business owners to watch for is expense controls and expense tracking capabilities that are built into the cards.
What is a prepaid debit card, and how does it work?
Prepaid debit cards are different than secured cards. Unlike a secured credit card, a prepaid debit card does not charge interest or help to build your credit. Like a secured card, you decide how much money to deposit. However, the money that you place on each of your prepaid debit cards serves as the available balance.
When your employees charge items for you on the cards, the purchases are subtracted from the balances that you have deposited on the cards rather than being charged to a revolving line of credit. Businesses may use prepaid debit cards so that they can exert more controls over their business expenses. Some companies prefer these types of cards because they are not linked directly to their checking accounts and do not require credit checks.
Why use a secured credit card instead of prepaid debit cards?
There are several reasons why a business might want to use one of the best secured credit cards rather than a prepaid debit card, including the following:
- Build business credit to have access to more financing in the future;
- You might eventually qualify for a business credit card without a personal guarantee; and
- You might qualify for a secured card even if you are unable to qualify for a regular credit card.
A secured card and a prepaid debit card can both help you to manage your cash flow better. However, another type of card called a business debit card might be an even better solution.
Business debit cards and how they work
Business debit cards are associated with a business’s checking account. When they are used to make purchases, the purchase costs are subtracted from the checking account balance. Business debit cards allow companies to assign expense categories and to allot different amounts to different employees.
Businesses that are both small and large use business debit cards. Some companies prefer them because they are debt-averse. Others like the control that the cards offer to them over their expenses.
Advantages and disadvantages of business debit cards
Business debit cards offer several advantages to businesses. Since they are not credit cards, businesses do not have to submit to credit checks, and business owners do not have to give personal guarantees. Purchases that are made with business debit cards are subtracted from the business’s own funds rather than adding to the company’s debt.
Business debit cards may also offer companies the ability to track and control their business expenses by each employee or by the department. Business debit cards also offer good transparency into the spending that is happening at a business.
Business debit cards also have a couple of disadvantages. They will not help you to build your business’s credit score. The cards also will not offer you a source of financing at times when you have cash flow problems.
Compare secured credit cards to business debit cards
When you compare secured credit cards to business debit cards, a few important differences emerge. Business debit cards may offer businesses a much greater ability to control, track, and manage their expenses. A secured prepaid credit card will require you to make a deposit. However, that money will be tied up with the card, and you will not be able to access it.
A secured credit card and a business debit card may both be used to make purchases wherever a credit card is accepted. However, purchases with the debit card will come out of the business’s own money, and will not incur interest charges. Purchases made with a secured credit card will be added to the credit line and will incur interest if the balance is not paid in full every month.
Expense controls with business debit cards: How they mitigate the risk of fraud
Businesses have to guard themselves against fraud. Fraud can happen from within the businesses as well as from without. Business debit cards can help to mitigate the risk of fraud with their expense control capabilities.
Some business debit cards have built-in features that allow you to set restrictions by merchant category code so that they can only be used to make purchases from select vendors. They might also give you the ability to set different limits on each card by the day or by the week. These types of controls can help you to reduce the risk of business fraud because you can control when they work and what they can be used to purchase. If someone steals the card numbers and tries to make unauthorized purchases, the attempts will not work.
Real-time monitoring with business debit cards
Another advantage of a business debit card over a secured credit card is the real-time monitoring. Another advantage of some business debit cards, is that a business owner can see the spending that occurs within the company in real time by logging into his or her company’s card dashboard. Businesses can see how an individual employee uses his or her card or track the expenses by the department.
Business debit cards also allow companies to turn individual cards off at a moment’s notice. If a business owner sees that a card has been misused from the dashboard, he or she can turn it off remotely with the click of a button or a tap on the screen of a mobile device.
Business debit card benefits
Business debit cards from Bento for Business offer some of the great features that businesses want. These business debit cards allow businesses to restrict where the cards can be used. Individual spending limits can be set on each card. The cards can be turned off or on whenever a business owner wants, even using their cellphone.
The company has earned hundreds of good reviews. There is a free demo that companies can request to see how the cards work and a 60-day free trial. For more information, call 866.220.8455.