Hi.
My name is John Ulzheimer, and I'm a credit
expert who contributes to creditcardinsider.com
Today's question is this...
Why do banks sometimes turn down applications
for secured credit cards even though the applicant
funds the credit limit with a deposit?
That's a very good question. A lot of people
can't understand why some banks will actually
deny applications for secured cards.
Now, if you're not familiar with a secured
card, here's how it works.
Secured cards are generally for consumers
who either have bad credit or no credit.
And they're used either as a way to rebuild
your report or to build a credit report from scratch.
What you will generally do is make a deposit
from a bank, say $500, and then the bank will
issue you a credit card with a credit limit
equal to your deposit, or in some scenarios,
slightly more.
So in the $500 scenario you may actually get
a credit card with a $500 credit limit.
So the bank is fully secured with their extension
of credit because you've already made a deposit
for the entire credit limit.
So if you charge items or charge services
and you refuse to make the payments, they've
already got your money, and so they're just going
to apply that money and offset your charges.
So what's a little counter-intuitive to some
people is, why in the world would they ever
deny somebody for that type of credit card
when they've already essentially got all the
payments prepaid in advance?
Well, here's the answer to the question...And
you're right, not all secured card applications
are approved. In many cases, they're denied.
Secured cards do not generate a lot of revenue
for credit card issuers, but in some cases they
can generate a lot of headaches for the card
issuer.
Think about someone who has a credit card
with a limit of $10,000, $15,000 $20,000.
They're out there charging, running up very
large balances, carrying those balances from
month to month, and paying somewhere in the
neighborhood of 15 to 29% as an annual percentage rate.
That is a very profitable customer for a credit
card issuer.
Someone who has a secured card generally has
a credit limit of $300 to $500.
You don't see many secured cards with limits
in the $10,000 and $15,000 range because that
would require you to put that large amount
of money down when you're opening the card.
Because you have such a small credit limit,
it's very unlikely that you're carrying a
very large balance from month to month, which
means that your not generating a lot of revenue for the card issuer.
If you've got very very poor credit, and when
I say very poor, I'm talking credit scores
in the 400s and the 500s, which basically scream
don't do business with me because I'm not gonna pay
my bills on time.
The credit card issuer still has no interest
in doing business with you because they know
you're not gonna make your payments.
And all that, essentially what that's gonna
force them to do is to offset your charges
with the money that you've already put down
as a deposit, and then eventually close your
card and return the unused amount of the deposit,
and then send you on your way.
That's not a very good experience for the
credit card issuer.
They've made little to no money. It's a huge
headache. It's a bad consumer experience because
you're not happy with them. And so all in
all it was an F in the consumer relationship
report card.
So that's why some secured card issuers will
still deny you even though you've prepaid
all of the charges.
Another reason, and this is less likely, but
still something to keep in mind, is that a
lot of people who move to the United States
from other countries, and therefore try to
establish credit in this country, try to do
so using a secured card.
The problem is that the laws, the federal
laws on the books because of the Patriot Act
are very strict with respect to issuing credit
to people who have just moved to this country
and aren't actually citizens.
So that can also be one of the reasons why
it's more difficult to open a secured card,
but primarily the reason why secured card
applications are denied is because, even though
they're targeted to consumers who are riskier
borrowers, there are actually some consumers
who are just such a hot potato, that even
secured card companies really don't wanna
do business with them.
If you have any other questions pertaining
to credit or other financial topics, please
submit them to creditcardinsider.com.
Thanks for watching.
Have a great day.
