Once a little-known option, secured credit cards for people with scant or poor credit are getting more attention.
This week, for instance, Amazon introduced a secured card called Amazon Credit Builder. Amazon said its new card was aimed at customers who were “looking to build or rebuild their credit responsibly.”
Secured cards are used mainly by people who don’t have much of a credit history, or have low credit scores. Borrowers make a refundable cash deposit — typically $200 to $500 — to “secure” the card’s line of credit. The security deposit serves as collateral and sets a spending limit; users can make purchases on the card up to that amount.
Then, as the cardholder makes monthly payments — hopefully, on time — the bank reports them to the big credit bureaus, establishing a pattern of sound credit management that can improve the cardholder’s credit score. Keeping a secured card open for two years was associated with a 24-point increase in credit scores, the Federal Reserve Bank of Philadelphia reported.
Eventually, the borrower can “graduate” to a traditional credit card with a higher limit, and get the deposit back.
“Secured cards are the most affordable and widely available tool to help people with low or no credit scores to establish credit or improve their scores, if they use it properly,” said Rob Levy, vice president of research and management at the Financial Health Network (formerly the Center for Financial Services Innovation), a nonprofit that promotes access to financial services.
Secured cards are a “small but growing” part of the credit card market, the Consumer Financial Protection Bureau found. Discover and banks like Citibank and Capital One offer secured credit cards, as do some credit unions.
The cards once were considered suspect. In the 1980s, fraudulent third-party brokers took finder’s fees and security deposits from consumers but never issued cards. In 1988, more than one million Americans were victims, paying more than $50 million to brokers, while only 10 percent of them obtained cards, according to the Philadelphia Fed’s report.
These days, the cards are considered a reputable way to build credit, but they remain underused. The Financial Health Network estimated that in 2015, there were fewer than six million secured card accounts, while about 108 million consumers could benefit from them.
That may be in part because some features, like the required cash deposit, make the cards hard for some people to use. Often, consumers who are approved for the cards can’t cobble together a deposit, the consumer protection bureau reported.
Also, the low spending limit may make it difficult for people to use the cards in a way that significantly improves their credit score. A major component of credit scores is the proportion of available credit that a person uses. Users of secured cards must keep balances quite low — ideally, 30 percent of the cap — to lift their scores, Mr. Levy said.
Secured cards also usually charge annual fees, and may have higher interest rates than traditional credit cards.
Even so, “the potential market for secured credit cards is huge,” the network found.
Amazon’s card, issued through Synchrony Financial, has no annual fee and offers a wider range of credit limits than most secured cards — as little as $100 or as much as $1,000, according to the company’s website. Credit Builder users may be eligible to move up to an Amazon Store Card after seven months of on-time payments.
The Credit Builder card can be used only at Amazon, making it akin to store cards offered by brick-and-mortar retailers. Its interest rate is a relatively high 28.24 percent. (The average rate on credit cards for people with poor credit was 25.33 percent as of June 5, according to the card site Creditcards.com.)
Amazon Prime members, who pay an annual membership fee, are eligible for 5 percent cash back on purchases with the secured card. But cash-back features tend to encourage spending, which can lead to higher balances and a slower credit score improvement, Mr. Levy said.
Users should be particularly cautious about the card’s special financing promotions, said Odysseas Papadimitriou, chief executive of the personal finance site WalletHub.com.
Credit Builder cardholders can, for example, get zero percent financing for six months on purchases of $149 or more, or 24 months on purchases of $799 or more. Minimum monthly payments must be made. But if the balance isn’t paid in full by the end of the promotional period, users will be charged the card’s full, double-digit interest rate from the date of purchase.
Users who are new to using credit, Mr. Papadimitriou warned, may be unfamiliar with how such promotions work and end up owing more than they can afford.
Here are some questions and answers about secured credit cards:
Can anyone get a secured credit card?
Secured cards are generally easy to obtain, as long as applicants have the required deposit. However, many banks won’t issue the cards to people who have a recent bankruptcy on their credit report.
What happens if I miss payments on a secured card?
If you fail to pay, the bank can draw on your security deposit instead. Missed payments are reported to credit bureaus, and are reflected in your credit score. Closing a secured credit card account because of default typically drops credit scores by 60 points, the Philadelphia Fed found.
Are there other types of loans that can help build credit?
Yes. Some credit unions offer “borrow and save” loans, in which borrowers agree to deposit part of a loan in a savings account, which they can unlock once they’ve repaid the loan. Online start-ups like Credit Strong and Self Lender offer similar digital versions.
New York Times
Written By Ann Carrns June 14, 2019