Issuers of secured credit cards have historically been regarded either as Good Samaritans or bottom-feeders-some helping re-establish credit to those who lapsed, and others seeming to rip off the guileless.
The number of Samaritans seems to be larger than ever as the secured card market gets a boost from the ever-growing presence of big-name banks, the continued interest in subprime lending, and the industry's effectiveness at avoiding the worst credit risks.
Loans on secured cards are backed by a corresponding bank deposit. The customers tend to be people trying to fix damaged credit histories. A consumer will deposit, say, $500 in a savings account and get a credit card with a $500 credit limit, and sometimes higher.
"There are over 100 issuers in the secured card marketplace, and there are a few issuers-large ones-that proactively are going out and soliciting cardholders through direct mail," said Nancy Hemenway, vice president of member relations at MasterCard International.
She estimated that there are 7.5 million secured cards in circulation.
Larger banks are wooing these customers because this is viewed as an untapped market, Ms. Hemenway said. "Most of our issuers have gone after the same potential cardholders who have wonderful credit ratings, that same fairly elite group, and this was an opportunity for them to expand the net."
Among the larger card issuers with secured programs are Citibank, Wells Fargo Bank, Chase Manhattan Bank, and Bank of America. Some banks do not actively market the cards but will offer them to certain applicants who do not meet standard credit criteria.
Vigorous efforts by some large card issuers have led at least one smaller bank to drop back. Key Federal Savings Bank of Havre de Grace, Md., whose name has long been linked to the secured market, now focuses on being an agent bank for institutions that want to start card programs.
"We stopped marketing in the subprime (area) about two years ago," said Robert Bouza, president of Key Federal. "We couldn't compete with Capital One (Financial Corp.) and Providian (Financial Corp.) and Metris (Cos.), which are spending zillions of dollars in mail campaigns."
When it tried to play in that league, Key Federal found itself lowering minimum deposits and raising credit limits as high as 200% of the deposit. "We were down as low as $250 for a $500 credit line," Mr. Bouza said. "We didn't do too well with that."
But small banks are still a force in the secured card market, according to Consumer Action, a San Francisco-based group that periodically surveys the market. It covers only issuers that do not charge application or processing fees, and this year it identified 21.
"Among the surveys we do, these are overwhelmingly popular," said Linda Sherry, editor of Consumer Action News, the newsletter in which the results were published. "It seems like a lot of people out there have gotten in trouble with credit and need a way to get back in step."
All banks included in the survey charged annual fees, ranging from $18 to $45. Most offered 100% of a deposit as a credit limit, though a handful offered 150% or 200%. All charged relatively high interest rates, about 17%.
"The high interest rates don't alarm me so much in these kinds of products, because we advise people that they are a stepping-stone" to an unsecured card, Ms. Sherry said.
What Ms. Sherry does dislike are application fees, which can run to $60 or more.
Patricia McCoy, senior vice president of First Consumers National Bank, Beaverton, Ore., said the secured market has been known for even more unscrupulous practices, mostly by industry outsiders trying to take advantage of "vulnerable and financially unsophisticated" people.
The 1980s saw "horrible 900-number problems" when consumers were urged to make one expensive call after another only to be given toll-free numbers of issuers, Ms. McCoy said. "You could rack up $150 in 900-number charges" for information that was available free, she said.
MasterCard has tried to ban 900-number solicitations. In the early 1990s, both associations took a variety of measures to clean up the secured card business and improve its reputation. Issuers say these efforts worked but new problems still seem to crop up. The Internet, for example, has become a magnet for dubious-sounding offers.
In the 1980s, most secured card issuers were small "no-name banks," said Ms. McCoy, whose company was one of the first in the market. It has about 650,000 accounts, both secured and unsecured. San Francisco-based Providian, the largest secured card issuer, went past one million cards in the fourth quarter. Others, like GE Capital, tried to make their presence felt but have pulled back.
"There is still a group of traditional issuers who avoid it like the plague," Ms. McCoy said. "It is not a business for everybody. Just because you are a finely honed card-issuing machine doesn't mean you can make a success of the secured card market."
Secured card issuers said customers will tolerate high interest rates but do recognize when they are being gouged. They need education about budgeting and credit. Many banks send out newsletters to tell people, for instance, how to send a payment so it arrives on time.
Customer service costs mount up, issuers said. Some cardholders call every time they send a payment. While an unsecured portfolio may hear from 3% to 5% of customers each month, Ms. McCoy said, a secured portfolio may get calls from 30% to 35%.
Secured card customers are "a loyal group" who can be very profitable, Ms. McCoy said. And many "graduate" to unsecured products.
"About 30% to 40% of any 1,000 accounts booked in a month will go unsecured in a year, and 55% in two years," Ms. McCoy said. "The rest will be in delinquent status but good enough to stay open."
Ms. Sherry of Consumer Action said information about secured cards can be hard to find. Her organization gathered data by calling the toll-free numbers of various banks and often found the representatives unknowledgeable.
Nevertheless, Ms. Sherry said, she was "really glad this kind of thing is out there."
"It can be very hard to get out of credit history hell," she said. "It's nice there is something that is fast and effective."