Coffee shop owner working with credit card reader and smartphone in coffee shop. Concept: secured credit card.
Betsy Wise
By: betsy_wise
Read in 9 minutes

What Is a Secured Credit Card?

Since the mid-1960s, business owners and individuals have been swiping, tapping or using chip card security to make purchases. If your credit history isn’t exactly stellar or you haven’t established credit, one way to get funds is to apply for a secured credit card.

In this post, we’re going to dig deeper into how a secured credit card works, its pros and cons, and the best alternative to getting the money you need without needing collateral to access to capital.

What is a Secured Credit Card?

One of the primary concerns for lenders is determining whether you’re a credit risk. If after analyzing your credit profile they arrive at the conclusion that you are, you’ll still be able to apply for a secured credit card, and you’ll be asked for a cash deposit to secure the credit card. Should you default on payments, they have collateral to cover their losses. In most cases, the deposit is the same as your credit limit.

For instance, if you put down $300 for a secured credit card, your credit limit will be $300. You probably wonder what will happen to your deposit. If you always pay off your credit card statement, you should get your deposit back.

How do Secured Credit Cards Work?

Before the card issuer can approve you for the card, they run a hard inquiry to assess your credit score and history. That process in itself normally lowers your credit score, stays on your credit history for up to two years, and causes you to pay higher interest rates on loans.

Once you are approved and pay a deposit, you can use the card the same as you would an unsecured credit card. You’ll receive a statement and make monthly payments with a goal to pay the balance in full to avoid paying interest. You could also make multiple payments each month to keep the card balance low.

Most users see their credit scores improve in about a year of getting the credit card and can usually qualify for unsecured credit (without the need of leaving a deposit). When that moment comes, it’s a good idea to ask the card issuer to transfer your secured credit card to an unsecured one. That way, you won’t need to open a new account which means your credit score won’t be affected.

How do fees and interest work on a secured credit card?

  • Depending on the card issuer, they may charge you an annual fee and related fees to open and use the account. These fees are separate charges in addition to the interest charged on unpaid balances.
  • The lender may offer an introductory APR (annual percentage rate) that’s normally lower for a specified time and then the terms switch to a regular or variable APR.
  • When the secured credit card has a regular APR, typically the lenders don’t change the rate for 12 months. A variable rate (also called floating rate) is riskier because the rate is tied into the U.S. Prime Rate. As the prime rate changes, the APR fluctuates up and down based on the bank’s margin. For example, if the prime rate is 5% and the bank’s rate is 12%, the total variable rate is 17%. For all these, make sure you are aware of how the APR works for your card.
  • Depending on the credit card’s structure and terms, the card issuer may charge a different rate for cash advances than they do for credit card purchases.

Golden Rule: Make sure you know how the APR works in your credit card. It could make a huge difference in what you end up paying for it.

Pros and Cons of Secured Credit Cards

Review this short comparison list to determine the advantages and disadvantages of using this type of funding.

Builds credit to qualify for unsecured loans when using the card responsibly You could lose your deposit when defaulting on payments
With bad credit, you gain access to cash or to make purchases Limited amount of cash may be inadequate for your needs
Use the card anywhere merchants accept them Collateral is required to secure the card
Some cards earn rewards such as cashback, travel points, etc. Interest rates are normally higher because you’re considered a greater risk. Also, you may be charged an annual fee, setup fee, credit increase fee, maintenance fee, and late fees
History of secured funding may not appeal to certain lenders

Camino Financial: Your Best Alternative to a Secured Credit Card

What if there was a way to get the funding you need that doesn’t require you to pledge security in the form of cash or other assets? There is. At Camino Financial, our loans have built-in features to accommodate the borrower. Some of them are listed below.

  • Our loans are unsecured, meaning you aren’t required to provide collateral
  • No credit history or minimum credit score required (another way we stand behind our motto, “No Business Left Behind”)
  • We make soft inquiries to review financial information which doesn’t affect your credit
  • We report your payments to Experian, so you build your credit with each monthly payment
  • As your credit score increases, after 8 months you’ll be able to graduate to a second loan (larger amount and lower interest rate)
  • Fixed interest rates and fixed monthly payments, so you don’t get any unpleasant surprises as you do with credit cards

As you can see, Camino Financial offers you perks you don’t get with a secured credit card. Plus, you have access to free online tools and resources that are available 24/7. When you are one of our clients, we keep in touch with you throughout the year to see how you’re doing.

Getting the Capital You Need

Running a business means you need working capital for day-to-day operations. What’s even more important is to keep your credit score in the upper range to secure ongoing funds. In some situations, like when you’re just starting out with your business or if you have bad credit, secured credit cards are a short-term solution to gain access to cash.

In the long-term, business owners would rather get unsecured loans to grow their businesses.

At Camino Financial, we not only provide these loans but also build relationships with our clients. Our goal is to match the right loan to your business needs. The application takes no longer than five to ten minutes and, you’ll be able to review pre-qualified terms within 24 hours.

We encourage you to apply today for a small business loan to gain access to capital at no risk and start building your credit.


Check if you
qualify for a loan