Secured credit cards combine the flexibility of a credit card with a forced savings mechanism in the form of a security deposit. The security deposit enables issuers to offer a credit card to someone who otherwise has insufficient or poor credit history. Over time, secured credit accountholders may “graduate” to unsecured credit products and financial services from their card issuer. In addition, the use of the secured card is reported to the credit bureaus, helping the consumer to build a credit score that may qualify them for additional financial products at other providers.
Despite their many benefits, secured credit cards are underutilized by the population that would most benefit from the opportunity to build credit. Secured credit cards make up only a small fraction of the credit card market at nearly six million active lines.1
At the same time, there are an estimated 108 million consumers whose credit score, or lack thereof, prevents them from accessing affordable, high quality credit when they need it.2 The potential market for secured credit cards is huge.
For secured card issuers, profit margins tend to be quite low, and in some cases negative, for the first one to two years. Thus, secured credit products must be viewed as a long-term investment for issuers.
However, financial institutions willing to make this investment in the financial health of their customers are likely to build strong customer relationships that can lead to more profitable product offerings in the future.
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