Credit unions may be able to take advantage of the increasing demand for secured credit cards.
Secured cards form a small portion of the overall credit card market. But this product can be a good way for credit unions to help members with less than stellar credit histories to improve their credit scores. That can inspire loyalty and create lifetime members.
Still these products can be challenging to offer since they generally don’t generate significant profits and must be actively managed.
“Secured cards are the first step for people who wouldn’t qualify for a regular credit card, and provide a perfect opportunity to build engagement with the [credit union] member,” said Nagendra Sastry, vice president of decision analytics at EXL, an operations management and analytics company.
Currently this segment of the credit card market has a total revolving debt of $1.3 billion. The secured credit card market is expected to reach 5.3 million accounts by 2021, which would be a 23% jump from 2018, according to data from Mercator Advisory Group and the Federal Reserve Bank of Philadelphia.
Secured cardholders generally have a FICO score below 650 when the account is opened. Because of the low credit score, the borrower typically has to make a deposit in the same amount of the credit line that has been extended. Credit unions offering this product ask for deposits ranging from $200 to $3,000, Sastry said.
Secured credit cards are inherently “low risk” since the issuers hold funds on deposit to cover the credit line, said Heather McGuire, senior product manager of credit cards for CO-OP Financial Services. At the same time, borrowers can improve their credit score by using the card and paying it off.
State Department Federal Credit Union of Alexandria, Va., has been offering secured credit cards for over 20 years and actively markets the product to members “who are trying to build or improve their credit,” said Victor Hall, the institution’s director of payments.
The $2 billion-asset credit union has about $1.8 million in loan volume on these cards, compared with roughly $1.2 billion total loans outstanding in March.
To qualify, the borrower must make a security deposit into a savings account. Members can then earn one point for each dollar spent through a rewards program. The card offers a variable APR of 14.24%, which is higher than average rates on its other credit cards.
“We have seen a growing demand for these cards,” Hall said. “We expect this demand to continue.”
These programs can be a “very valuable tool in their larger strategy to educate consumers” as well as to attract new members from underserved markets, McGuire said.
Still, there are challenges with offering secured cards. A secured credit card program may not necessarily produce much return on investment, McGuire said. These cards typically have lower limits and balances that generate less income to offset the added administrative expense of managing the program.
“The risk for issuers is more in the management of the program,” McGuire added. “Unless the secured credit card program is actively managed as part of the credit union’s larger strategy, they run the risk of the program stagnating and becoming only an expense instead of contributing to their overall profitability.”
The majority of the secured card customers are “transactors,” meaning they pay their credit card balances in full and on time, do not carry a balance from month to month, and do not pay interest or late fees, Sastry said. That cuts into any potential profits.
Profitability can be contingent on credit unions having a strategy that efficiently moves members who have improved their credit into more valuable products and services, like unsecured credit cards.
Navy Federal Credit Union in Vienna, Va., implemented a program earlier this year to move qualified members from its secured credit card to its unsecured cashRewards product, said Justin Zeidman, head of credit card products at the $103 billion-asset institution. Cardholders may qualify for an unsecured card if they make monthly payments on time and keep their card utilization low, he said.
“We start reviewing a cardholder's account as early as six months [after origination] to determine if they're eligible to be upgraded to our cashRewards credit card,” Zeidman said.
Additionally, credit unions are competing against fintechs for consumers interested in secured credit cards. But credit unions have a few advantages. For one, credit unions, unlike the fintechs, have savings and checking accounts from their members.
“Credit unions can link the secured cards to these deposits accounts, know their members better, therefore the risk of default in comparatively lower,” Sastry said. “Credit unions can also offer personalized secured cards to their members and help them build their creditworthiness faster and better.”
McGuire said that credit unions could differentiate their secured credit cards from those offered by fintechs and other issuers by appealing to younger consumers who are often “focused on doing business with organizations who demonstrate social responsibility.”
“Credit unions can offer more than just a credit card, they can offer all of the benefits of credit union membership,” she said. By offering options like secured cards as part of the membership package, she stated, “younger generations can learn the responsibilities of having a credit card and start establishing good credit at a young age.”
