Secured credit cards play an important role in consumer credit for those with thin or no credit records. They enable the credit challenged – whether they be people with tarnished credit files or outside the realm of robust credit files.
In a deep dive on secured credit cards, we explained how the CARD Act of 2009 cleaned up the industry. The CARD Act drove out hard-money lenders with exorbitant junk fees and opened the door for legitimate offerings in the space. We estimate that the U.S. market has 4 million active secured cards, issued by top credit card brands. Some issuers avoid the market, such as American Express and Chase, but many others have successful programs that help towards financial inclusion. From where we sit, secured credit cards are an excellent investment for credit card issuers – much better than using alternative credit data.
There are plenty of people who would benefit from the structure of a secured credit card. Research indicates that 11% of the U.S. adult population of 260 million is “credit invisible,” without enough data to build a credit record, and another 8% is unscorable. On top of that, we estimate that 38 million have FICO Scores <650.
We called out an excellent program at KeyBank last year, and today, they released an update on their secured card progress. The firm celebrates successful secured card candidates and announces the graduation numbers publicly, a unique spin that we believe is best in class. Release:
Today, KeyBank (NYSE: KEY) announced its May 2022 graduating class of the Secured Credit Card, which include 4,343 clients whose credit scores and financial stability have significantly risen as a result of participating in the program.
Since it began in 2018, KeyBank has helped more than 15,000 clients improve their financial standing.
69% received a KeyBank Secured Credit Card with no FICO score at origination
31% were designated as having low FICO scores at origination. A majority of which were designated as a low score.
The average improvement in credit score for those in the low category was 81 points.
And the bank issuing program wins. Our rule of thumb on credit card acquisition costs is that it costs about $250 per acquired account excluding incentives. Assuming that the bank is not out harvesting bad credit files, and investing heavy dollars into marketing, there looks like a nice $1 million save in acquisition costs.
But even more important is the enrichment of credit-stressed consumers, which will likely become committed customers and savers.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group