In a move that could undercut the burgeoning market for secured credit cards, an influential group of lenders has agreed that the cards should be flagged on credit bureau reports.
As a result of the consensus at an Associated Credit Bureaus meeting in Dallas this month, the so-called metro tape that many bankers use to report consumer credit information is being altered so lenders can indicate whether an account is secured.
This will put pressure on banks to provide information that very few provide today.
"The group believes that credit grantors need to report the truth, because it is the only true reflection of a customer's credit history," said John V. Skinner, president of Jewelers Financial Services of Irving, Tex., who led the discussion at the meeting.
Stigma of a Bad Risk
The idea could run into resistance, however. Some fear the disclosure would stigmatize the cardholders as bad risks and reduce the product's appeal.
"Give me a reason why we should report it, other than to identify or tag these customers as bad credit risks," said David A. Alexander, marketing manager for First Consumers National Bank of Beaverton, Ore. The unit of Chicago-based Spiegel, Inc. has been issuing secured credit cards since 1989.
Gerri Detweiler, director of the Bank Card Holders of America, agreed that the change could be bad news for consumers who use the cards.
"Reporting secured cards as regular bank cards serves the best interest of the consumer and the grantor," the consumer advocate said. "The problem with singling out secured cards is that they attract a variety of customers. You might be lumping in a widow who has never had a credit history with someone who has filed for bankruptcy three times."
Secured cards have become one of the hottest new product categories on the menu of many credit card issuers. They are seen as an alternative, now that the market for standard credit cards is reaching the saturation point.
The cards enable banks to expand by establishing relationships with consumers who do not yet have a credit record, or who have a poor one.
The consumers are able to get what looks and works like a normal MasterCard or Visa card by securing their credit line with a deposit at the bank.
Citicorp, Chase Manhattan, Corp. and Signet Banking Corp. are among the commercial banks now bidding for a share of a market that once was the province of a few specialists.
Although many experts say the cards should not be marketed as a way to repair credit records, many issuers tell applicants that an unsecured card may be issued once they establish a good payment pattern.
Most lenders do not differentiate when reporting to credit bureaus between conventional cards and those that are secured by a bank deposit.
Supporters of more complete reporting say there is no evidence that disclosure would result in a negative rating for secured card holders.
"Secured cards have not earned a value yet, either positive or negative. What issuers need to do is report the data and let it fall wherever it may," said Mr. Skinner.
Credit grantors do not have to denote a secured card on the form. Still, the presence of the category will make it difficult for financial institutions to justify not reporting secured cards. If they don't, the record could look incomplete to a lender running a credit check.
The credit bureau companies will encourage issuers to use the new category.
"It makes our job easier when we are counseling a consumer on his or her report if we have a complete file," said Larry L. Smith, senior vice president of TRW Information Services.