Defaulting on a Secured Credit Card

Debit
photo credit: Ciaran McGuiggan

In order to obtain a small business secured credit card your company must first hand over a security deposit. This money is held in a special account as collateral and protects the card issuer in the event that you fail to make the required monthly payments to repay your borrowing.

Different companies have different rules for how they respond in the event of a default. Some will not take any action for up to six months so long as the outstanding amount remains less than the deposit. By contrast, some companies will cancel a card and deduct their costs from the deposit after only a single missed payment.

Small business secured credit cards can be used to rebuild a poor credit history but only if payments are kept up to date. If you think there is any chance that you might not be able to make future payments, it is important to ensure that you choose a card that has the fewest penalties and gives you the best chance of avoiding a black mark on your credit record.

Many people make the mistake of thinking that, because there is money on deposit, they are able to dip into it if they are short of the money to make their regular monthly payment. This is never the case. Although the card issuer is holding sufficient money to cover the full amount of the debt, they will treat a default as if the money were not there at all.

One of the easiest ways to damage your credit rating is to fail to make regular payments. Clearing your balance in full each month also saves you from having to come up with additional cash to cover interest charges, which are almost always higher with secured credit cards than with the regular kind.

You also need to bear in mind that a regular payment schedule will lead to you having a positive credit history. If you miss a payment, your rating will be affected and it will be much harder for you to obtain credit next time around.