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The Need is There: Secured Credit Cards as a Credit-Building Tool

Friday, June 28, 2019

By Laura Cummings, Director, Financial Health Network

Amazon’s new Credit Builder secured card has ignited debate and dialogue about access to credit and the role secured cards can play in helping or harming consumers. We often hear about the millions of Americans who are deep in credit card debt, which points to the downside of credit cards and the risk of credit in general. However, secured cards require a deposit and generally offer a credit limit of less than $500, making it impossible to ring up thousands in debt even with the typical high interest rates. When utilized correctly, secured cards can be an effective tool in improving credit, thereby supporting overall financial health.

With more than 100 million Americans credit-challenged, secured cards pose a significant market opportunity. Typically, credit-challenged consumers are limited to more expensive short-term credit options such as payday loans or high-rate subprime credit cards, and debit or prepaid cards to make online purchases. By integrating secured cards into their product offerings, companies like Amazon can help millions of consumers build or rebuild their credit.

It can be tempting for consumers to stay away from any type of credit to safeguard against debt, but a thin credit file can have negative repercussions. Credit history, and a positive credit score, are increasingly used in employment and housing decisions, alongside determining the price of credit and insurance products. Consumers need a way to build or rebuild their credit and secured credit cards can offer that path.

How does Amazon’s Credit Builder card stack-up?

The Financial Health Network’s research on the secured card market “Secured Credit Cards: Innovating at the Intersection of Savings and Credit” identified several challenges that must be addressed for the secured credit card to be more attractive to consumers. These include consumer awareness, funds needed for the deposit, education on how to use the card to improve credit score, and providing a clear path to graduation to other products. Per these insights, Amazon’s Credit Builder card is doing several things right:

  • The name: Credit Builder. Naming the card Credit Builder explains the ultimate goal of the card without complicated financial jargon.
  • The low deposit of $100. The minimum security deposit for the card is $100, which is low for the market and makes it easier for new customers to access the product
  • No annual fee. Outside of the deposit to get started, there is no nonrefundable annual fee.
  • The credit monitoring dashboard. An interactive credit dashboard makes the black box of credit scores more transparent and encourages positive behavior to continue building credit.
  • The graduation path. Amazon is clear that this card is an entry point. Users will build credit by making on-time payments, which are reported to the three credit bureaus, and cardholders are automatically reviewed for upgrades to an unsecured Amazon Store Card after seven months, at which point their deposit is returned.

While this is not an endorsement of Amazon’s Credit Builder product, it is encouraging to see a retail giant take steps to help its customers improve their financial health. Secured cards do come with their drawbacks, including high interest rates — this card offers a 28.24% APR, one of the highest on the market — but they have the potential to make dramatic positive change. For most, this is a credit product that can put them on the road to financial health.

To learn more about the Financial Health Network’s research on the market opportunity and potential for secured credit cards, visit our website.

By Financial Health Network on June 28, 2019.

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