© Zoltan Matuska

Understanding Secured and Unsecured Credit Cards

If you have no credit or bad credit, getting a secured credit card and using it sensibly can assist you to build a good credit history. A secured credit card is like an unsecured credit card in a number of ways. The major difference between secured and unsecured credit cards is that with a secured card you have to make a deposit.

This deposit provides collateral if there is a default on your account. Usually a lender will have less severe credit requirements for a secured credit card. When a lender issues an unsecured credit card they take the risk by approving the applicant. But they will only usually approve an application for an unsecured card against a very good credit history.

There are secured credit cards for business as well but these are different. They provide a separation and also protection between the business and card holder’s personal credit. A lot of small businesses choose unsecured credit cards. They need a credit card to run their business and it tells others that the business is genuine. It can help with the monitoring of expenditure too.   

It is essential that the business owner ensure that an unsecured credit card will protect their personal credit history if there is a default and also eliminate any personal liability.

Understanding Unsecured Credit Cards

There is no collateral requirement with an unsecured credit card. So the terms of use are based on your credit rating, the information provided in your application, your ability to pay and so on. There is a slightly higher risk for the card issuer without any security.  

To be clear, the ability to pay relates to a secure income. People that do not have a steady job and work for themselves typically find it more difficult to obtain an unsecured credit card.

To get an Unsecured Credit Card what Credit Score do you need? 

You are not going to see a credit card issuer disclose their lending criteria as they consider this proprietary information. However, experienced credit consultants (like us) can make a well informed guess about status of your credit report and score required to be approved for an unsecured credit card. 

Usually lenders will not provide unsecured credit cards to individuals whose credit history is weak. Usually people that have a credit score starting from 650 and higher will have the best chance of getting an unsecured card.

If you are the owner of a business and are willing to take the risk of using your private credit history and your personal credit report to apply for an unsecured business credit card, You will need a very good or excellent credit score to obtain approval.

As an example, American Express will not issue an unsecured business credit card to anyone that does not have a credit score of at least 700. You will never get an unsecured business card from American Express if you have no credit, bad or fair credit. 

This strategy is risky for the business owner as they are at the mercy of any issues experienced by their business. If the business starts to suffer financially then the owner will have to suffer the consequences with their unsecured card.

Will a Secured Credit Card improve your credit? 

Yes they can. In fact they can work very well for both the consumer and business credit bureaus. Use a secured card wisely and it can really help you to develop a robust credit history. It doesn’t matter if you are a consumer or a business owner the main thing to check is that your card issuer reports your activity to the 3 top credit bureaus. 

The most effective way to use a secured credit card is not to have a balance carried over from month to month. This will help to improve your credit reports and score. If you can, avoid the carrying over of any balances. 

Choosing the right Credit Card as a Business Owner

You will want to ensure that you work hard on your personal credit reports and also develop the credit history of your business. If there is a need to repair your business credit status then focus on doing this. You can start to develop your business credit with a secured credit card.

If you have no credit for your business or it is weak, you will find that there are a number of companies out there that can help you by offering secured credit cards. 

As with a consumer secured card, you will have to make an application on behalf of your business and support this with a deposit for the establishment of an initial line of credit. The deposit is usually around $500 to $1,000 and once you have your card you will receive statements just as you would with an unsecured card.

You can use a money order, certified check or wire transfer to make your deposit. It is going to take around a week to 10 business days to receive your secured business card.

You will need to provide the following documents with your application:

  • The business license of the company 
  • Articles of incorporation 
  • Verification of your address
  • Federal tax ID#
  • Reference from your bank
  • An authorized users list 
  • The number of cards that you want issued

Before you make a final decision it is important that you check these two things:

  1. Read the terms and conditions and then read them again to ensure you fully understand them 
  2. Find out which of the commercial credit agencies the company sends reports to and the frequency of the reports

It is imperative that you make any payments in line with the contractual agreement of the secured credit card. This will assist you in establishing a business credit history that is impeccable with the business credit agencies.  Please be aware that the business credit bureaus have different standards of operation and different rules compared to consumer credit bureaus.

After a few months of making payments on time you should be able to request a higher credit limit if you need it. The card issuer will review your account and if you have used your card wisely they will probably grant the higher limit without requiring a further deposit.