With so many different business credit cards on the market today, it can be difficult to keep all the details straight. Two very broad (and key) categories that credit cards fall into are “secured” cards and “unsecured” cards. There are also prepaid cards, which can feel similar to secured cards, although they are not technically credit cards. We’ll break down all three card types today.
The main difference between secured and unsecured cards is that a secured card requires a cash deposit at credit card account opening to set the credit limit, while an unsecured one has no such deposit requirement. Meanwhile, prepaid cards are load-and-pay-as-you-go. Read on to learn more about how prepaid cards, as well as secured and unsecured credit cards work.
In this article:
- Prepaid vs. secured vs. unsecured cards: A high-level overview
- Deposit requirements for the 3 card types
- Interest rates and other fees for prepaid, secured, and unsecured cards
- How application approvals work for each card
- How each card helps your business credit
- Graduating from prepaid and secured cards to unsecured cards
Prepaid vs. secured vs. unsecured cards: A high-level overview
Though there are many different types of credit cards on the market, secured cards are likely to be the first ones you encounter as a business looking to start building business credit. This is because this type of card is easiest to get when you have little to no credit history, or don’t have very good credit. You may also encounter prepaid cards (which are not credit cards).
Unsecured cards are the credit cards you are likely more familiar with. These are the ones that come with credit lines that you don’t have to put a deposit down for.
Here’s a breakdown of the key differences between prepaid, secured, and unsecured cards.
|Prepaid cards||Secured cards||Unsecured cards|
|Require you to load a set amount. You can then spend that amount and reload.||Require a security deposit to set the credit line.||No security deposit or other collateral required to set the credit line.|
|No credit line||Usually, credit lines up to $50K (that require deposits of $50K+)||Usually, credit lines up to $50K, subject to credit approval|
|Not a credit card; no borrowing occurs||Credit card; the credit card provider lends to you, holding the security deposit in case of account default||Credit card; the credit card provider lends to you, without holding any collateral|
|May report, varies by card||May report, varies by card||May report, varies by card|
❗Important definition: Collateral is something of value (such as cash, property, or other assets) that is pledged to a lender by a borrower in the event that the borrower can’t repay. A security deposit is a form of collateral.
What is a prepaid card?
A prepaid card is one where you load a set amount onto the card, and then can spend that money. It’s similar to a gift card. There is no credit being extended to you by a lender, meaning you aren’t borrowing money when you use a prepaid card.
Some credit card issuers include prepaid cards in their card offers for businesses that don’t yet qualify for their unsecured credit cards. However, it’s more likely that their entry level, credit-building card is a secured credit card.
What is a secured credit card?
A secured credit card is one that requires a refundable security deposit. Technically, the issuer is extending credit, but with a security deposit that they hold as collateral. This is required to reduce the issuer’s risk. It is usually returned in the event that you close your account, or if you were to be upgraded to an unsecured card (more on that later).
In case of default, the security deposit is available to the card issuer to cover the money owed. However, your deposit should not be thought of as your backup payment; late payments will usually be reported, and any interest or other fees owed will be charged.
Secured cards are typically a more viable option for businesses that have yet to build an excellent credit history, or that have low credit. Because businesses like these are deemed riskier to lend to, they can get declined when applying for a “traditional” (aka unsecured) credit card.
Learn more about how secured credit cards work
What is an unsecured credit card?
An unsecured credit card is one that does not require a security deposit (hence, un-secured, or “not secured”). Instead, the issuer extends a credit line based on how they assess your business’s creditworthiness and financials during the credit card application process. You do not have to put any money down as a requirement to open an unsecured credit card.
Unsecured credit cards do not necessarily come with higher credit limits than secured ones. However, the credit limit is not determined by how much you can afford to put down as a cash deposit. Unsecured credit cards may also come with more perks, such as cash back and other rewards, than secured credit cards.
Of the three types of cards discussed in this article, unsecured cards are the most difficult to qualify for. Many require a personal guarantee, which holds the business owner personally responsible for all money owed if the business cannot pay. Personal guarantees also usually require personal credit checks.
Prepaid cards may come with deposit limits. Many have limits of $10,000 to $15,000. Loading the card is required in order to be able to use it.
Similar to prepaid cards, paying your security deposit is required before you can start using a secured credit card. However, unlike prepaid cards, spending money on your credit card does not draw down your deposit; it draws down your credit line. This is a subtle but important difference.
Deposit amounts for business credit cards can start anywhere from $500 to $2,000, and can range up to $100,000 (or even higher). Usually, the security deposit acts as the entire credit limit on your secured card, although policies differ from issuer to issuer. Sometimes, the required security deposit is slightly more than your credit limit.
Unsecured credit cards do not require any kind of deposit to activate or use them.
Interest rates and other fees
These types of cards usually don’t come with any fees such as APR.
Some secured credit cards charge interest, while others don’t. Secured cards tend to come with higher interest rates, as well as more fees than unsecured credit cards, but this is not always the case.
For example, the Bank of America Business Advantage Unlimited Cash Rewards Secured credit card allows you to make a minimum payment and carry a balance. Because of this, it comes with a 27.99% variable APR (at the time of this writing). For reference, the average APR for business credit cards in 2021 was 14.22% to 22.19%.
The Tillful Card is an example of a secured credit card that does not allow you to carry a balance. Instead, the whole balance is due at the end of each billing period. As a result, it does not have any interest rate fees.
Then there are other fees that credit providers may charge for secured cards, but not for their unsecured cards. For example, certain Wex fleet cards come with activation and inactivity fees. Without getting too far into this, the extra fees likely exist because most secured card programs are not as profitable for credit card companies as their unsecured counterparts.
Secured credit cards may also charge users maintenance fees and balance inquiry fees, among other charges. These charges will differ by card issuer. Be sure to check the fine print!
All unsecured cards, except for charge cards, will charge interest. Charge cards are those that don’t allow you to carry a balance (but that’s a whole other topic!).
In addition to APR, unsecured cards may charge annual fees, balance transfer fees, late fees, and more. The types of fees, as well as the amount of the fees charged, will vary by card type. For example, a 0% APR card (like the Chase Ink Business Unlimited) may come with an introductory offer of 0% APR for a certain number of months. A rewards credit card that features an amazing rewards program (such as the American Express Business Gold card) may come with an annual fee.
In addition, the unsecured credit cards that require the most excellent credit will likely come with lower interest rates than more entry level credit cards, including secured credit cards.
Generally, prepaid cards are the easiest card to get. Some card issuers treat prepaid cards as their most entry level option instead of outright denying you for credit. After some time, you may be able to upgrade.
However, again, it is most likely that the entry level card for a credit card provider is a secured credit card. If this is the case, it’s best not to treat your secured card like a prepaid card or debit card. Doing so will most likely hurt your credit score.
You may also be able to pick up a prepaid card without an application.
Secured credit cards are generally seen as starter cards for businesses looking to build or rebuild their business credit. You are more likely to be approved for a secured credit card than for an unsecured one, especially if you are a new business and/or have poor business credit. Since the deposit you place on a secured card backs your credit line, there is less at stake for the issuer, which increases the likelihood of approval.
However, having the funds for a security deposit does not guarantee you automatic approval. There are situations where your secured card application could be turned down, including insufficient income, or when a lender is unable to verify your business.
On the other hand, unsecured credit cards tend to have stricter requirements and to be more difficult to get. Many may also require a personal guarantee, which means that the credit card company is actually approving two entities: your business, as well as you personally, the business owner.
Note that for personal guarantees, credit card issuers often pull your personal credit (Experian, Transunion, or Equifax, and potentially FICO), and expect you to personally have a good credit score.
By extending an unsecured line of credit, the card issuer is taking on a significant amount of risk. In order to avoid or minimize non-payment, the card issuer scrutinizes unsecured card applications more closely. Applicants with higher credit scores are usually preferred, although there are unsecured card options for businesses of all credit levels.
How each card helps your business credit
Most often, prepaid cards do not report to the major credit bureaus. However, you can check by calling the card issuer. Because of this, these are unlikely to help you build business credit.
Even if the prepaid card does report to the bureaus, it’s likely to hold less weight than a secured or unsecured credit card.
Secured cards and unsecured cards
When it comes to building your business credit score, both secured and unsecured credit cards will serve that purpose. Credit reports do not always distinguish between secured and unsecured cards, and most major credit card companies will report your credit information to the credit bureaus. Your business credit score stands to improve from using either card type, as long as you’re a reliable user who makes payments on time.
As stated previously, if you have a bad credit score, secured credit cards can help you build credit (and obtain more later) despite the upfront cost of the security deposit.
Graduating from prepaid and secured cards to unsecured cards
Certain prepaid and secured card issuers offer upgrades to an unsecured card version if you use your card responsibly and make on-time payments. You will usually need to exhibit good payment habits for at least 12 to 18 months to qualify for an unsecured card. Bear in mind that this is only possible for cards that have the capability of graduating from prepaid or secured to unsecured.
To increase your chances of being upgraded, be sure to engage in responsible use of your secured card. This includes keeping your credit utilization at around 30%, and making all payments before or by the due date. You can also try raising your limit by depositing more, and then demonstrating that you can still make all your payments on time. These send good signals to both your credit card provider, and to the business credit bureaus.
Once the upgrade happens, your security deposit will be returned to you and your previously secured credit card becomes unsecured. If your credit card provider does not offer the option to graduate, you can always take the manual route and use a secured credit card to build your credit, which you then use to get an unsecured credit card with a different provider!
Last word on prepaid, secured, and unsecured credit cards
As a business owner, you may prefer an unsecured credit card for its no-deposit-required credit limit. However, qualifying for one depends on your business credit history and other factors. Exploring your options with secured credit cards that report to the major bureaus can be a necessary first step in building out your business credit profile. It’s a long game, and if you use your secured card wisely, then an unsecured credit card may not be as far out as it feels!