Secured Credit Cards Post 21-Percent Growth

`I COULDN'T get a regular credit card," says a resident of Framingham, Mass. This woman, who asked not to be identified, says her card applications were turned down many times because she had filed bankruptcy when her business failed several years ago.

Recently she was able to get a "secured" credit card from American Pacific Bank. To get the card, she had to make a bank deposit as collateral against possible default.

"This is my first attempt to start rebuilding my credit history," the Framingham resident says.

Secured credit cards are offering a similar opportunity to thousands of people with poor credit histories or no established credit histories. Last year the number of these cards jumped 21 percent to 700,000, according to Ram Research Corporation, a credit-card consulting firm in Frederick, Md.

Behind the boom is the recognition by banks of a long underserved market.

"There are so many people who can't get a traditional unsecured VISA or MasterCard," says Gerri Detweiler, executive director of Bankcard Holders of America, a consumer-credit education and advocacy group in Herndon, Va. She notes that about 60 percent of all credit-card applications are rejected by banks. Industry analysts estimate that nearly 10 million Americans fail to qualify for unsecured bank cards each year.

With a saturated market for conventional credit cards, their "poor second-cousin" is becoming more attractive to banks, says James Daly, editor of Credit Card News in Chicago.

One hundred financial institutions offer secured MasterCard and VISA cards, up from 35 in 1992. Some of the major banks entering the market are Citibank, Associates National Bank, Chevy Chase Savings & Loan, Fleet Bank, and Signet Bank.

For years, banks shied away from offering the product because of its bad reputation. Several issuers had been fined for deceptive marketing. The problem has lessened since MasterCard and VISA tightened rules on the issuing of cards, says Robert McKinley, president of Ram Research.

"The growth in the secured-card market has been pretty explosive," says Irving Levin, head of credit-card programs for Orchard Bank and American Pacific Bank, both in Portland, Ore. Within 18 months these two banks attracted more than 100,000 accounts.

"There is a misconception that these cards are only for those who have a terrible credit record," Mr. Levin says. More than half of his customers are divorcees, widows, and immigrants who do not have a credit history.

"To get a consumer loan in the US, you can be in as much trouble if you have no credit history as if you have a bad history," he adds.

The line of credit for a secured card is equal to the amount people deposit with the bank to secure the card. Because of this limit, "the card really keeps people out of too much debt," Ms. Detweiler says.

The issuing banks report the payment record to several major credit bureaus. A customer with no credit history can, after 18 months of payments, become eligible for an unsecured credit card. People with a credit problem such as bankruptcy or unpaid debts may have to wait several years, according to Ram Research.

"Most people don't realize that paying a VISA or MasterCard on time or over time is usually the strongest reference you can have on a credit report. It is stronger than a mortgage or car loan payment record," Detweiler says.

"In the past 14 months I paid on time and paid in full in most cases," says a business consultant in Marietta, Ga., who was able to switch from the secured card to an unsecured one because of his good payment record.

The business consultant says he did not like the 18.9 percent interest rate on his secured card: "You have to put your money up front. Even though you earn a small interest on the deposit, you pay a very high rate for the card.... What you are doing is you are borrowing your own money at a very, very high rate."

But as the competition increases among card issuers, consumers with poor credit can obtain cards with rates as low as 12.99 percent, while people with no credit history can locate cards with rates as low as 8 percent, according to Ram Research. And interest paid on the security deposit can be as high as 5 percent.

In choosing a card issuer, consumers should consider whether the issuing bank reports to at least one of the major credit bureaus: TRW, Equifax, or Trans Union. Also, experts say, avoid banks that charge application fees, which can amount to hundreds of dollars.