Asset-secured cards can aid or hurt those with bad credit

Secured credit cards are a credit-building solution for people with bad or limited credit. Approval for a secured credit card is based on one’s ability to put up the cash deposit, usually $200$300, which becomes the card’s credit limit.

But a deposit requirement can present financial hardship. Cardholders get the full deposit back when they close the account or upgrade to another card from the same issuer, but not everyone can afford to tie up cash indefinitely.

Some financial technology companies are offering solutions for limited liquidity: asset-secured cards. Credit limits on such cards are backed by collateral like fine jewelry, a car or home equity. As such, credit lines on asset-secured cards can be higher, and interest rates may be lower, compared with a traditional secured card.

As asset-secured cards have solved one problem, they’ve created a few more. Some of these cards require cardholders to send away their collateral items or car title. A bigger credit line means more spending power but could also lead to bigger debt. Plus, defaulting on these cards could result in the loss of something essential to one’s livelihood.

Brian Riley, director of credit advisory services and co-head of payments at Javelin Strategy & Research asks, “Do you really want to put everything at risk in a credit card?”

Lower interest rates

Credit card interest rates have risen as the Federal Reserve has hiked the federal funds rate to fight inflation. As of August, the average interest rate on interest-accruing cards was 22.77 percent. This financial environment gives some asset-secured cards instant appeal.

“The advantage of these products is the lower interest rate,” says Jessica Duncan, assistant vice president of research and insights at Competiscan, a market research company. “If they’re putting a balance on the card, it’s revolving at 8 percent rather than 26 percent.” The card from fintech Aven that’s backed by home equity has interest rates as low as 7.99 percent.

Higher credit limit or higher credit score?

With asset-secured credit cards, the collateral item’s value determines the credit limit. For people who own something valuable but don’t have a high credit score, these cards could unlock credit lines typically reserved for those with good to excellent credit. James Savoldelli, founder and CEO of Pesto, the fintech behind the card secured by items like jewelry, says that cardholders have put up collateral worth $20,000.

For some, a big credit line is a lifeline that covers expenses when cash runs dry. But for others, it can be a debt trap. Traditional secured cards mitigate the risk of overspending by imposing credit limits, often at a few thousand dollars. That’s by design: Cards secured by small cash deposits aren’t financing tools; they’re meant to help people build credit through responsible use.

That goal seems secondary when it comes to some asset-secured cards. Pesto says it wants to give you fast access to credit; Yendo, the company behind the card secured by a vehicle, says it’s helping “people (who) need extra money to make ends meet.”

Collateral loss

Credit card defaults are serious matters that can result in damaged credit, among other consequences, but defaulting on an asset-secured card might have worse outcomes.

Depending on the collateral backing the card, cardholders could lose their car or home because of default. Jordan Miller, CEO and co-founder of Yendo, and Savoldelli both say that their companies want to help cardholders avoid default and have procedures to help those in danger of doing so.