Secured Credit Cards Harder to Get

If you're someone who needs to establish or rebuild your credit, don't wait for secured card offers to land in your mailbox. Direct-mail offers for a secured card are quietly dwindling in number, and fewer major issuers are offering the cards.

Secured credit cards are those backed by a deposit made by the consumer, typically equal to the credit limit of the card. That collateral, usually a minimum of $200 or $300, sits in a savings account that isn't tapped unless the cardholder defaults. Because these cards pose little risk to banks, they're easier to obtain and can help people who can't qualify for unsecured cards to build a good credit history.

The volume of secured credit card offers has seen a precipitous drop in recent years. "The decline in secured card offers is substantially greater than the overall decline in credit card mail offers in total," says Stephen Clifford, vice president of financial services for Mintel Comperemedia, a marketing research firm based in Chicago.

His company estimates that the number of mailed secured card offers plummeted from 122 million offers in 2001 to less than a million offers in 2008 while the volume of credit card solicitations mailed to U.S. households sank by about 18 percent during that same time period, from 6.7 billion credit card offers to 5.4 billion offers. Secured card direct mail volume fell by 58 percent from 2007 to 2008.

Eight years ago, Capital One, Washington Mutual, Credit One Bank and HSBC Bank were the biggest issuers that sent secured cards offers, says Clifford. Of these, only HSBC still offers a secured card. Chase, which acquired parts of Washington Mutual in September 2008, closed WaMu's small secured card program and doesn't offer its own secured card product. As of 2008, the biggest mailers were New Millennium Bank, which targets subprime borrowers, followed by Bank of America.

It may sound counterintuitive that fewer major issuers would offer such a low-risk product, but the pullback comes down to profitability. "It's not necessarily the risk in the context of the secured credit card relationship, but potentially the risk of establishing that type of relationship customer basis in a credit sense," says Bruce Cundiff, director of payments research and consulting at Javelin Strategy & Research, a financial services research firm in Pleasanton, Calif. The administrative costs of opening and managing the accounts must be offset by the fee revenue from the cards because people don't typically revolve sizable balances on these low-limit cards.

In other words, people must use them. He says that alternatives to secured credit cards, such as prepaid cards and debit cards, which can serve as payment cards for those with poor credit, erode their profitability.

"The indication we're getting from these large issuers in paring back their secured credit card programs is that we're on the other side of that balance right now, where it's not necessarily worth it to go through all the effort necessary to issue that card," says Cundiff.

In general, credit card marketing is down, "but it's further exacerbated in the subprime space because they are in this credit crunch trying to distance themselves in their portfolios from that subprime space," says Curtis Arnold, the founder CardRatings.com and author of "How You can Profit from Credit Cards." He says issuers are focusing more on acquiring prime borrowers.

He thinks secured credit cards will take "an even more prominent role going forward" and may offer the only credit card option for many people if credit card legislation drives issuers away from offering subprime cards. Already, new credit card rules were passed in December that will limit the fees applied during the first year after issuance.

As for consumer demand, Emily Peters, credit expert for Credit.com, says her company, which generates leads for credit cards, saw a 27 percent increase in clicks on secured card products in the fourth quarter of 2008 compared to the previous year.

If your credit is poor or limited, you can still build it back up with a secured card, even if you're not getting any offers. Search online or check with local banks or credit unions and compare available offers on secured credit cards.

Be aware though, that not every card is a good deal. Read the terms and conditions and consider the following tips:

• Get a secured credit card that reports. A card that reports to the three major national credit-reporting agencies will help you establish or improve your credit history.

• Watch out for excessive fees. Secured cards will usually charge an annual or membership fee, but "in general, you don't want to pay an annual fee over $20, $30," says Arnold. Comb the terms and conditions for disclosures about other fees, such as those for processing, usage, additional cards or "rush" delivery of the card.

• Look for low rates. The mean APR for secured card offers is 19.07 percent, says Andrew Davidson, vice president of competitive tracking services at Synovate Mail Monitor, a global market research company. Shoot for the lowest rate you can find and you'll pay less interest on revolved balances.

• Beware the nonexistent grace period. Beyond checking for the lowest rate, make sure the credit card has a grace period, this is how many days you have before the issuer applies interest to your new purchases. Most cards have a grace period of 20 to 25 days that applies only when the previous balance has been paid in full.

Cards that don't have a grace period mean that charges would immediately accrue interest, regardless of whether you paid the balance the previous month. New Millennium secured cards, for example, do not have a grace period for purchases or cash advances. Read the terms and conditions to see how finance charges are calculated.

• Make sure you can graduate. After making steady payments for a stated number of months, the issuer will refund your deposit and upgrade you to an unsecured card, typically within a year. Check the eligibility guidelines or ask if they're not posted. Also, check the array of credit card products the bank offers. Look for companies that offer unsecured cards besides those that are predatory and laden with fees, suggests Robert D. Manning, director of the Center for Consumer Financial Services at Rochester Institute of Technology and research professor of consumer finance. That way you won't have to apply somewhere else as soon as you qualify for an unsecured card. New inquiries on your credit report could temporarily ding your credit score.

• Consider "interest"-ing cards. The Citi Secured MasterCard and the Orchard Bank Secured MasterCard, for example, pay interest on the deposit. Free money is hard to pass up, but make sure the interest rate and other terms are favorable based on your spending and payment habits.

Also, first ask about or read the eligibility requirements to make sure you get approved. Generally, most people get approved for secured credit cards, but you can get turned down. For instance, Wells Fargo mandates that applicants not have declared bankruptcy within the last year or have unsettled liens. You have to be older than 18 in certain states to qualify for a card.

• Bank of America Secured Visa Credit Card. It has a $29 annual fee and a variable interest rate, currently at 14.24 percent. The minimum deposit is $300.

• Citi Secured MasterCard. It charges a $29 annual fee and a variable rate, currently at 13.24 percent. Cardholders can upgrade to an unsecured Citi Platinum Select credit card after 18 months. Consumers deposit a minimum of $200 into a CD, which will earn interest. An early-withdrawal fee applies if the account is closed before 18 months pass.

• Wells Fargo Secured Visa Card. The annual fee is $18, and the variable APR is 17.99 percent. Consumers must pony up a minimum of $300. For a yearly fee of $19, cardholders can add a rewards component to the card. Customers may be eligible to upgrade to an unsecured account after 12 months.

• Orchard Bank Secured MasterCard. This card, issued by HSBC, charges a variable APR of 7.9 percent and waives the $35 annual fee the first year. The minimum deposit is $200, which will earn interest.

• U.S. Bank Secured Visa Credit Card. After 12 months, cardholders can upgrade to an unsecured product. Minimum deposit is $300. The annual fee comes to $35 and the variable interest rate is 18.99 percent.