Key Bank reports that another 4,343 of its customers have moved from a secured credit card to a traditional account after they were able to significantly raise their credit scores.
Since 2018, the bank has operated a program in which consumers with poor or no credit can build up their credit standing through the use of a secured credit card. This is important because many of these consumers would otherwise be unable to qualify for a credit card.
A secured card works the same way that a regular credit card does, but there's one big difference. With a traditional “unsecured” card, the lender has no collateral in case of default.
To open a secured credit card account, a consumer deposits a sum of money – often around $500 – into a bank account to serve as collateral in the event of default. They make purchases with the card and, if they pay their bills on time, earn points with the credit reporting agencies. In the process, they also tend to develop good financial habits.
Among the latest group of “graduates,” Key Bank says 69% had no FICO credit score at the time that they opened an account. Another 31% were designated as having low FICO scores at origination. At the end of the program, the bank says the average improvement in credit score for those in the low category was 81 points.
"Our graduates are in a greater financial position coming out of this program," said Mitch Kime, KeyBank executive vice president of Consumer Client Growth. "With their newly improved standing, they are better positioned in applying for loans, more banking opportunities, and in some cases, better insurance rates. All of it adds up substantially towards creating a financially healthy life for themselves."
Many other banks offer secured credit cards, but consumers should shop carefully because some may carry much higher fees than others. Danni White, a member of the ConsumerAffairs credit card research team, says a secured credit card can be a useful tool for a significant portion of the population.
“If your credit score is too low for you to get approved for a personal credit card, then a secured credit card might be your path to rebuilding your credit history,” she wrote.
Secured credit cards are available with no annual fee. However, these cards tend to have interest rates that are greater than 20%, even though the account is secured and there is no risk to the lender.
That should encourage users to pay the account in full each month. That helps save money on interest charges while helping to develop good financial habits.