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PERSONAL FINANCE / KATHY M. KRISTOF

Banks Strongly Pushing 'Secured' Credit Cards

August 21, 1994|KATHY M. KRISTOF

Consumers who want to rebuild recession-scarred credit histories can take heart. Banks that once shunned customers with checkered pasts are now aggressively trying to lure them in with "secured" credit cards.

And they're offering unusually good deals--at least comparatively speaking--to show that they mean business.

Secured cards, offered to people with no credit history or who have had credit problems, are similar to ordinary credit cards except that to get one, you must deposit money in a bank. The amount of your deposit is usually the same as your credit limit on the card. The bank generally pays you interest on your deposit. You must pay an annual fee for the card, as well as principal and interest payments if you maintain a revolving balance.

San Francisco-based banking behemoths Wells Fargo and Bank of America have both recently introduced new and improved secured credit cards. Sanwa Bank in Los Angeles launched a low-rate secured card last week.

Meanwhile, New York-based Citibank, which has offered a secured card since 1991, recently cut the interest rate on its secured cards. Citibank's secured rates are now no higher than rates charged to good credit risks.

These banks are only indicative of what's happening everywhere, says Robert McKinley, publisher of CardTrak, a Frederick, Md., credit card newsletter. Where there were only about 35 secured card issuers in 1990, there are now more than 400, he says. And rates and fees have plunged.

In the past, these cards were often prohibitively expensive. Many came with interest rates of 20% or more and annual fees ranging from $35 to $90. But that wasn't all. Customers would also have to pay "application and processing" fees that could add up to $100. Then, if their payments were late, or if they wanted access to their deposits, they were charged additional fees.

While some of these fees remain--particularly for late payment--application and processing fees are now rare. Better yet, many big banks offer their secured cards at the same interest rate as ordinary cards. At Citibank, Bank of America and Wells Fargo, for example, secured cards cost the same as standard cards.

Sanwa Bank takes it a step further. Last week it launched a 15.9% secured card. Sanwa's ordinary credit card customers--the "good risks"--pay 17.25%.

Annual fees on secured cards range from about $18 to $75. But these fees are often waived if you have checking account overdraft protection linked to the credit card, bankers say.

Why the sudden push for "bad risks"?

Two reasons. First, there are available customers in this market. Second, banks have learned that these customers are not as bad as they thought.

The average U.S. household already has about nine credit cards--three of which are multipurpose bank cards, McKinley says. Because nobody needs that many cards, credit issuers know that they've got to steal market share from their competitors if they want to grow. In the past they've done that by marketing to "affinity" groups, such as frequent fliers, senior citizens and animal lovers. More recently, they've even started cutting their stratospheric interest rates.

But once all the Elvis Presley fans were spoken for--and credit card rates hit historically low levels--the industry was forced to plumb areas it had traditionally avoided.

"This market is so saturated that issuers are turning rocks over looking for customers," McKinley says.

At the same time, bankers learned some encouraging facts about secured card customers.

First of all, there are a lot of them.

MasterCard International, which turned its attention to the secured card market last year, found that there were roughly 26 million potential cardholders.

*

Better yet, the vast majority of that number, roughly 20 million individuals, were not "bad" risks--people with past bankruptcies or payment problems. They were simply new immigrants, 18-year-olds, divorcees and widows who simply hadn't established credit in their own names. And this group, thanks to aging, divorce and immigration, grows by roughly 6 million to 7 million individuals each year, says Brian Schwartz, MasterCard's director of new market development.

If that wasn't enough, some of the veterans in the secured card market maintain that secured card customers are good risks. Citibank, which monitors such things, says 70% of its secured card holders prove to be so reliable about paying their bills that they "graduate" to ordinary unsecured cards in less than two years. (In other words, they don't have to deposit money to keep the card.)

The bottom line: If you want credit and don't yet have it, now is the time to apply. But shop around for banks that will give you a reasonable interest rate on the card and also pay a decent rate for your deposits. And ask how long you must maintain a reliable payment history on the secured card before the bank will give you a regular card.

Charging It

Over the past three years, the number of secured card issuers has soared . . .

Year Number of Issuers 1992 35 1993 120 1994 400

. . . and the average interest rates charged have fallen.

Year Unweghted average rate Weighted average rate* 1992 18.41% 19.61% 1993 17.78 19.13 1994 14.96 18.70

* Average interest rates are weighted according to receivables. This figure gives more weight to interest charges of large issuers.

Source: Ram Research & Publishing Co.

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