Secured cards: public relations ploy or financial health builder?

Secured credit cards are having a moment due to the recent introduction of Amazon’s new Credit Builder card and the recent release of a Federal Reserve study on secured cards that proves that secured cards really do improve consumer credit scores.

Rob Levy, vice president of research and measurement, Financial Health Network

This all comes on the heels of the U.S. Financial Health Pulse study that found that 72% of people are not financially healthy, with credit and debt challenges being one of the biggest hurdles. Given this context, secured cards such as Amazon’s can be a critical tool for financially vulnerable people to build credit for the future and improve their financial health, while saving potentially thousands in interest and fees over their lifetime.

But when market-moving companies announce the introduction of a secured card for financially struggling consumers, specifically on their e-commerce platform, it should be asked, is this a public relations stunt or a genuine effort to help the millions of Americans who are struggling to establish credit or improve their credit scores?

Scepticism about secured cards is not new. Though they have been growing in popularity, secured cards remain one of the least understood and underappreciated tools to help people build or rebuild credit history.

In 2015, the Financial Health Network found that only 5.5% of the 108 million consumers whose credit scores, or lack thereof, were preventing them from accessing affordable, high-quality credit were utilising secured cards. Without a prime credit score, millions of Americans are unable to access affordable credit, increasing the likelihood that they will turn to high-cost forms of credit in times of need. Additionally, credit scores are increasingly being used to make decisions beyond the financial realm including employment, housing, and insurance products.

Secured cards work with the consumer to improve and build their credit score so the consumer can move into a traditional, unsecured product over time. Some also have the ability to earn interest on the security deposit and offer benefits similar to an unsecured card such as cash back and rewards.

These cab be a critical tool for financially vulnerable people to build credit for the future.

To obtain a secured card, unlike with traditional credit cards, a cash deposit must be made. The security deposit amount – along with the consumer’s salary and ability to repay – determines the credit line amount for the card. These products generally offer a low credit limit of less than $500. Each month, the card provider reports payments to the credit bureaus to build the customer’s credit history.

Over time, secured credit account holders may “graduate” to unsecured credit products and financial services from their card issuer, which typically offer larger credit limits and lower APR. And the pace of graduation is finally increasing. In 2017, 20% of accounts started that year graduated after just 11 months, compared to 61 months back in 2012.

There are several challenges that must be addressed for secured cards to be attractive to consumers, according to the report, “Secured Credit Cards: Innovating at the Intersection of Savings and Credit.” These include increased consumer awareness, available funds for the deposit, education on how to use the card to improve credit score and to provide a clear path to graduation to other products.

Our research also identified four areas that organisations should consider when developing a best-in-class secured card, several of which can be found in the new Amazon card:

1. Build clear and visible awareness for the card so that the consumers that most need it can know and understand the product.
2. Utilise customer segmentation and customization to create a card that better meets the immediate and long-term needs of users.
3. Develop a customer graduation strategy so that customers can move into the mainstream credit products that they are aiming for.
4. Leverage the security deposit as a savings promotion tool to also address savings shortfalls that detract from financial health. In our research, 63% of secured card holders reported planning to use the deposit for savings after graduating, yet most providers do not offer this option when the deposit is returned.

When used correctly, secured cards can help an unscored customer to establish a credit score, on average, in about six months. For those that have few other pathways to credit, secured cards can provide a path to the financial mainstream and better financial health.

By Rob Levy,vice president of research and measurement, Financial Health Network