A secured credit card operates largely the same as a traditional credit card, with one key difference; the amount of credit extended to the cardholder is backed by a cash deposit held as collateral in a special deposit account, with credit limits typically ranging from 50 to 100 percent of the amount of funds in the account.
Just as with an unsecured card, cardholders are charged interest for purchases that aren’t paid off each month, while annual and monthly fees also are common and count against the available credit amount.
Should a secured credit card holder default or miss a certain number of minimum payments, the issuer can dip into the reserve funds to collect the amount owed. That cash collateral is what gives secured credit cards their name, acting as security in the event of nonpayment of the debt—in the same way that a car loan is backed by the vehicle itself–thereby significantly mitigating risk for the issuer.
Unsecured credit cards, on the other hand, are backed only by the contractual agreement between the issuer and cardholder. For this reason, a consumer typically must have a relatively high credit score to be approved for an unsecured credit card; extending credit backed by nothing but the cardholder’s promise is simply too great of a risk for most issuers.
Of course, building good credit requires obtaining credit in the first place, leaving those with poor or thin credit in a catch-22. That’s where secured credit cards come in.
Because secured cards are backed by cash deposits, they can be offered to cardholders with weak credit—or those with thin credit histories, such as young consumers and members of historically unbanked groups—with minimal risk to the issuer. Meanwhile, monthly balance and payment information is reported to the major credit bureaus, so cardholders who responsibly use secured credit can improve their credit scores and eventually qualify for an unsecured card.
In this way, secured credit cards offer a win-win proposition for both card providers, who earn interchange revenue from purchases made with cards, and consumers, who can use such products as a prime path to credit improvement and financial inclusion.
Despite the clear benefits to both parties, secured credit remains a largely untapped vertical. According to estimates, there are as many as 121 million adults in the U.S. with thin or poor credit, and yet there are only 6 million secured credit cards in circulation. Based on spending volume projections, the overall addressable market for secured cards could be nearly $1 trillion annually, according to some estimates.
To help providers capitalize upon that opportunity, Galileo has developed a modernized, market-leading secured credit platform that offers secured card holders enhanced usability, flexibility and financial security—in turn, driving more interchange revenue and profitability for secured card issuers.
Galileo’s API-based technology enables secured cardholders to quickly and easily change the amount of cash held in the collateral account, freeing up those funds to make any bill or emergency payments that may arise. That’s important, because one common pitfall of traditional secured credit cards is that cardholders whose funds are tied up in the collateral account often can’t meet unexpected costs and are forced to use more of their credit than is prudent, leading to high interest and fees. By offering bi-directional transfer into and out of the secured account, Galileo enables secured cardholders to access cash that isn’t being used as collateral for outstanding balances–providing more flexibility to pay for surprise expenses.
Meanwhile, Galileo’s modernized secured credit model also features the capability to pay off charges made on the credit card with funds in the secured cash account, giving cardholders a cash reserve from which to pay for credit purchases to better avoid incurring fees and damaging their credit due to missed or late payments.
In both of the above features, the amount of available credit on the secured card is automatically changed to correspond with the amount held in the cash account, ensuring a cardholder’s credit limit is properly collateralized by the reserve funds. If a customer needs to withdraw the excess collateralized funds, they can choose to do so.
Additional advances currently in the works will further improve the flexibility and functionality of the secured credit products that can be designed via Galileo’s platform.
By making secured credit cards work better for cardholders who need them, issuers can gain customers and drive increased usage, reaping significant rewards in the form of the resultant interchange fee revenue and securing a bigger piece of the $1 trillion market opportunity.
To learn more, read Galileo’s report on how secured credit cards can drive fintech growth.
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