Citicorp Sets Up Test Of Secured Credit Card

NEW YORK -- Carving out a new niche for its MasterCard and Visa business, Citicorp is testing credit cards for consumers who do not qualify for its conventional products.

The nation's biggest credit card bank has begun offering the new cards, which are secured by deposits, to consumers who have short or less-than-stellar credit histories.

If the cardholders demonstrate an ability to manage their secured accounts, Citicorp will issue standard cards.

The experimental program, launched earlier this summer, represents an unusual move for a large bank-card issuer and lends legitimacy to a marginal segment of the consumer credit business.

Growth Spurt Possible

Dominated by a handful of small, highly specialized institutions, the secured-card business is believed to be poised for rapid growth as issuers intensify their search for cardholders in a slow-growing market.

Among the leading secured-card providers are Bank of Hoven, S.D., with about 125,000 accounts, and Key Federal Savings Bank of Havre de Grace, Md., with more than 50,000 accounts, according to RAM Research USA, which tracks card rates and fees.

Before Citicorp, the only major banking company in the business was Banc One Corp., which acquired a small secured-card portfolio when its Indiana subsidiary acquired a thrift.

A spokeswoman for Citicorp, which leads the industry with some 20 million MasterCard and Visa accounts, described its effort as a small test designed to get secured cards into the hands of "tens of thousands" of people.

"If there is a good market for this kind of card, we might do it on a large scale," said the spokeswoman, Susan Weeks. "That's why you have a test."

To receive a Citicorp secured card, consumers must acquire an 18-month certificate of deposit at a simple interest rate of 7%. The minimum deposit is $300, the maximum $500.

With the CD serving as collateral, Citicorp issues the depositor a standard MasterCard or Visa card with a credit line equal to the deposit. Secured-card holders pay the same annual fees and finance charges as other Citicorp customers.

Customer Upgrades Planned

According to Ms. Weeks, the company will monitor its secured accounts until the CDs mature. Customers who have proved creditworthy will be allowed to keep their cards on an unsecured basis.

"The idea is to help people who have not had credit before, or who have had credit problems, prove they can handle credit," the spokeswoman said. "It's a recognition on our part that people who don't have a credit history can use credit responsibly."

Secured cards may also give Citicorp - which already has more than $30 billion in credit card loans outstanding - a way to continue to grow in what is widely regarded as a saturated market.

Competition Growing Keener

Most consumers creditworthy enough to carry conventional credit cards are believed to already own at least one MasterCard or Visa card. And competition to get more credit cards into these consumers' wallets is especially keen.

At the same time, the potential market for secured cards is huge, according to William Lucas, president of Command Credit Corp., a Rockville Centre, N.Y., company that runs secured card programs for banks.

He said 70% of applicants for traditional bank cards are turned down. He maintains that many of these consumers can manage credit.

"A lot of the big banks are going to be getting into it," Mr. Lucas predicted.

New Entries in the Wings

Robert B. Mckinley, president of RAM Research USA in Frederick, Md., said six large credit card issuers have recently requested information on existing secured-card programs.

"The quality of credit card applicants is not what it was five or six years ago and the market is saturated," Mr. Mckinley said. That makes it "inevitable" that the secured business will grow, he said.

But the secured card market may be difficult to crack. About 30 million to 50 million Americans are believed to be "credit needy," but it is unclear how many of these consumers have enough cash for the security deposit.

Further, while the deposit is designed to minimize the marginal customers' risk, there remains a potential for losses, observers say. Checks written by these consumers to pay credit card bills are more likely to bounce than other checks. And cardholders can exceed their credit limits if they make many small purchases that do not require merchants to seek authorizations directly from issuing banks.

"The secured-card marketplace has always been something of a mirage," said Elgie Holstein, president of Bankcard Holders of America, a consumer group in Herndon, Va. "It has always held this great fascination for issuers because there is a huge pool of people out there who are supposed to be desperate to scoop up these cards. But when you get closer, the mirage disintegrates into ether."

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