hi. my name is john ulzheimer, and i'm a creditexpert who contributes to creditcardinsider.com today's question is this... why do banks sometimes turn down applicationsfor secured credit cards even though the applicant funds the credit limit with a deposit?
Union Plus Credit Card Payment, that's a very good question. a lot of peoplecan't understand why some banks will actually deny applications for secured cards. now, if you're not familiar with a securedcard, here's how it works. secured cards are generally for consumerswho either have bad credit or no credit.
and they're used either as a way to rebuildyour report or to build a credit report from scratch. what you will generally do is make a depositfrom a bank, say $500, and then the bank will issue you a credit card with a credit limitequal to your deposit, or in some scenarios, slightly more. so in the $500 scenario you may actually geta credit card with a $500 credit limit. so the bank is fully secured with their extensionof credit because you've already made a deposit for the entire credit limit. so if you charge items or charge servicesand you refuse to make the payments, they've already got your money, and so they're just goingto apply that money and offset your charges.
so what's a little counter-intuitive to somepeople is, why in the world would they ever deny somebody for that type of credit cardwhen they've already essentially got all the payments prepaid in advance? well, here's the answer to the question...andyou're right, not all secured card applications are approved. in many cases, they're denied. secured cards do not generate a lot of revenuefor credit card issuers, but in some cases they can generate a lot of headaches for the cardissuer. think about someone who has a credit cardwith a limit of $10,000, $15,000 $20,000. they're out there charging, running up verylarge balances, carrying those balances from
month to month, and paying somewhere in theneighborhood of 15 to 29% as an annual percentage rate. that is a very profitable customer for a creditcard issuer. someone who has a secured card generally hasa credit limit of $300 to $500. you don't see many secured cards with limitsin the $10,000 and $15,000 range because that would require you to put that large amountof 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, whichmeans that your not generating a lot of revenue for the card issuer. if you've got very very poor credit, and wheni say very poor, i'm talking credit scores in the 400s and the 500s, which basically screamdon't do business with me because i'm not gonna pay
my bills on time. the credit card issuer still has no interestin doing business with you because they know you're not gonna make your payments. and all that, essentially what that's gonnaforce them to do is to offset your charges with the money that you've already put downas 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 thecredit card issuer. they've made little to no money. it's a hugeheadache. it's a bad consumer experience because you're not happy with them. and so all inall it was an f in the consumer relationship
report card. so that's why some secured card issuers willstill deny you even though you've prepaid all of the charges. another reason, and this is less likely, butstill something to keep in mind, is that a lot of people who move to the united statesfrom other countries, and therefore try to establish credit in this country, try to doso using a secured card. the problem is that the laws, the federallaws on the books because of the patriot act are very strict with respect to issuing creditto people who have just moved to this country and aren't actually citizens.
so that can also be one of the reasons whyit's more difficult to open a secured card, but primarily the reason why secured cardapplications are denied is because, even though they're targeted to consumers who are riskierborrowers, there are actually some consumers who are just such a hot potato, that evensecured card companies really don't wanna do business with them. if you have any other questions pertainingto credit or other financial topics, please submit them to creditcardinsider.com. thanks for watching. have a great day.
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