Secured credit cards, once regarded as the murky fringe of the card business, are taking on an air of legitimacy that has regulators heaving sighs of relief.

The cards, which appeal to people who need to establish or reestablish a good credit history, used to be marketed mainly through newspaper classifieds or in the wee hours on television.

It was a low-risk, low-profit business for smaller card issuers. Some were simply interested in building assets quickly; others were guilty of misallocating the deposits that served as collateral for the credit lines.

But in recent years, the secured market has attracted some of the industry's biggest players, and smaller ones that stress their reputability. All are on a constant search for untapped niches in a saturated market, which has led them into secured-card issuing.

The forces of good seem to be winning. The business has won a stamp of approval from the Federal Reserve Board's Consumer Advisory Council, which looked into the business and saw no reason to step up regulatory oversight.

"Secured cards have a history of being marketed in questionable ways, but I haven't seen those old late-night television ads for at least two years," said Michael Ferry, a member of the advisory council. Mr. Ferry is an attorney for a legal aid program in eastern Missouri.

Regulators are keeping a watchful eye, however, to make sure the industry stays on the straight and narrow.

Just how many secured cards are in use is a matter of speculation.

RAM Research, a credit card tracking service in Frederick, Md., said that using official bank data it has verified 100 secured credit card programs, With 700,000 active accounts in all.

But the actual number is probably much higher -- perhaps five million or 10 million -- said Robert McKinley, RAM's president.

MasterCard International estimates that the potential market is 26 million consumers -- 14 million widows, divorcees, and immigrants; and four million to six million who are bad credit risks.

Bells Are Ringing

The consumer affairs division of the Federal Reserve Bank of Philadelphia reports it is fielding more calls than ever from consumers who want to know which banks are offering secured cards.

"Most of the calls are from people who can't get credit,' says an official at the bank.

The growth in the secured card business, and concern that it targeted vulnerable population segments like recent immigrants and the poor, led Federal Reserve governor Lawrence Lindsey last year to ask for a report from the Fed's consumer advisory panel.

In June, the council said it saw no need to make formal recommendations. It found that the potential for consumer abuse had abated and that the industry was doing an adequate job of self-regulation.

The entry of big names like Citicorp, Fleet Bank of Massachusetts, and Signet Bank of Richmond, Va., have combined with guidelines of the MasterCard and Visa associations to set the favorable tone.

Singled out for concern in the advisory council's report were third-party marketers who solicit customers for banks, and catalogues that deceptively advertise "gold cards" that can only be used with those catalogues.

|900'Numbers Banned

Some marketers and catalogues were using expensive "900" number systems to solicit card applications. Some also charged high up-front processing and application fees.

The credit card associations have addressed this problem by forbidding the use of pay-per-call "900" numbers. Marketers, among other restrictions, are also required to register with the card. associations and submit their, consumer literature for review.

But the third-party marketers have not gone away. Their latest wrinkle is the sale of life insurance in exchange for a secured line of credit.

For example. National Credit Card Services Association of Waltham, Mass., a marketing agent for banks, has relationships with Ocean Independent Bank of Ocean, N.J., and Key Federal Savings Bank.

Key Federal, in Owings Mills, Md., is a pioneering issuer of secured cards and has built a sizable consumer credit business around them.

The association offers a Visa card with a credit line ranging from $500 to $1,000, which is secured with a cash life insurance policy.

|A Longer-Term Investment'

Richard Wirth, an attorney for the association, said, "We don't associate ourselves with credit repair" programs, which promise to "beat the system" and get credit for people who have filed for bankruptcy.

"We tell our customers that this is a longer-term investment, that it takes years to build up cash value," Mr. Wirth said.

Consumers are given the option of purchasing new life insurance with, say, $50 premiums, or they could use an existing policy with sufficient cash value as the collateral for a line of credit. In the latter case, the bank is responsible for collecting the collateral if the customer defaults. In the former, National Credit Card Services Association guarantees the issuer does not lose money if the customer defaults.

For a secured card through the association. consumers must pay a $39 processing fee and $5, in monthly membership dues, in addition to the $35 annual credit card fee to the bank.

"This seems like a very expensive way for a consumer to avoid a down payment," said Mr. McKinley, "especially when some programs require as little as $250 for a line of credit. Furthermore, in terms of pricing secured cards are now almost in line with unsecured cards."

Mr. Wirth said most of the association's customers would not qualify for a regular unsecured card.

The extra layer of fees typically charged by third-party marketers have contributed to the perception that secured cards are a rip-off.

Credit Reporting Issue

While the Federal Reserve Board accepted its advisory council's findings, members of the council say they will continue to monitor the secured phenomenon. Similarly, the Office of Thrift Supervision plans to form a group to look at the secured card business, said an agency spokesman.

One unresolved issue troubles some observers: Some banks disclose to credit bureaus that a customer has a secured card, but most do not.

John Skinner, a Fed advisory council member and president of Jewelers Financial Services of Irving, Tex., said it is important to establish a disclosure policy.

"How do you rate a consumer who is delinquent and whose secured deposit is tapped to pay off the balance?" he said. "Do you say the debt was paid off or that it was delinquent?"

New Code System

Even if some banks wanted to make this distinction, the credit reporting agencies would not be able to accommodate them, because their systems don't have a code for secured cards.

According to the Associated Credit Bureaus in Washington, banks that have been reporting secured cards as such have to mark off a general category called "secured line of credit," which does not make it clear that the card is secured.

This will change when a revised coding system is introduced early next year, to include secured cards for the first time. Credit bureaus will then encourage banks to make the necessary distinction.

Denny Dumler, chairman of the Fed's advisory panel and chief executive officer of Rocky Mountain Bankcard System in Denver, said, "We concluded that if a bank has factual information it should report it."

On the other hand, regulators are still concerned about what effect reporting a secured card will have on a consumer's ability to establish credit, Mr. Dumler said.

Banks are concerned, too. If a customer's credit rating is hurt by reporting a card as secured, then the product loses one of its attractive features.

"The whole idea is not to report the cards as secured," said Jeannette Williams, MasterCard International's director of marketing.

Concern About Guarantees

Robert M. Bouza, president of the credit card operations at Key Federal Savings Bank, believes that the real issue is deeper than whether banks should report secured cards.

"I have a problem with the issuers that are guaranteeing a credit card," he said.

"Key Federal accepts only 65% of its secured-card applicants, and for half of the people we reject we can't verify basic information like employment and residence." Mr. Bouza said. "So where do they go after they are turned down by us?

"People who want to beat the bank with some kind of fraud can do that in a guaranteed environment."

Signet Bank has ads that say, "If you think you can't get a credit card, think again. Now, you are guaranteed approval regardless of past credit problems or lack of credit history."

MasterCard Manual

Mr. Bouza will head a new MasterCard secured-card advisory forum, which will look at the issue of credit bureau reporting.

In the meantime, MasterCard will soon release a study that it describes as a comprehensive manual for banks in the secured business. It will outline different ways bank could market their product, and who the potential customers are.

According to MasterCard, people who have never established credit represent one of the greatest areas of opportunity.

MasterCard also sees a growing interest in a product for high-income people who could qualify for an unsecured card but chooses a secured product to increase his credit availability or otherwise get a better deal.

Among banks that have taken the plunge by offering secured card programs, the competition is heating up. Generally, the cards' interest rates are higher than average, and credit lines range from 50% to 125% of the associated deposit.

Recently, Signet Bank and First Consumers National Bank of Portland, Ore., began offering credit lines up to 150% of the security. Fleet Bank of Massachusetts is offering a secured card with a very competitive 13.4% interest rate, and United Bank of Philadelphia, a recently organized minority bank, offers credit lines of $100 in excess of the amount on deposit.

Higher Profit Margins

As more banks enter the secured arena, analysts expect price competition will resemble that on standard cards. Interest rates could continue to come down and annual fees disappear.

That may not be too costly to issuers, as profit margins are actually higher on secured cards. The Consumer Advisory Council reported that the cost of funds is lower, and that 90% of secured card balances generate finance charges, versus about 70% in the unsecured market.

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