Secured Credit

Galileo clients who want to offer their customers a way to build credit can use Galileo’s secured credit product to achieve this. With secured credit, the cardholder deposits funds in a separate collateral account, and the amount in this account governs the credit line extended to the cardholder. The cardholder is billed for the full amount owed against the credit line at the end of each billing cycle. If the cardholder does not pay the full amount, you can decide to pull funds from the collateral account, reducing your risk of loss. Payment activity may be reported to credit bureaus, and as a result, the cardholder can exhibit a pattern of consistent repayment and build a credit score.

Galileo’s secured credit product is a charge card product. A charge card is a credit product where the balance is due in full at the end of each billing cycle. With a charge card, cardholders are not offered a minimum payment and cannot carry a balance into the next month (known as revolving credit). This means that interest is not assessed on secured credit products. Instead, you can source revenue from interchange (the amount paid to you by card networks) as well as optional fees, such as program fees and late fees. Despite the differences, the charge card associated with secured credit is often referred to as a “credit card” in marketing materials. Secured credit can help protect your customers from falling into a debt cycle and makes an effective credit-building program.

Secured credit use cases

Depending on how you set up your secured credit offering, you can support these use cases:

  • Young adults with little or no credit history can build or improve their credit history.
  • Individuals with poor credit histories can improve their credit rating.
  • Adults with no credit history, such as immigrants to the United States, can establish a credit history.
  • Flexibility to book car rentals and hotels (this is an optional configuration that can be disabled).

Overview of secured credit accounts

To create a secured credit account, you start with a conventional primary spending account and add to it a secondary collateral (secured) account and a credit account.

The cardholder deposits funds into the collateral account, and that collateral becomes the credit line for that card. For example, if a cardholder deposits $200 in the collateral account, the credit line on the card is $200. If the cardholder deposits an additional $200, the credit line increases to $400.

If a cardholder fails to pay the full amount of a monthly bill, you can decide whether to pull funds from the collateral account to pay the rest of the bill, or you can decide that the account is in default and close it. If you transfer funds from the collateral account to pay the bill but do not close the account, the credit line is reduced by that amount.

Example scenario

Sally is 19 and has a checking account with you. She is unable to obtain a traditional credit card because she does not have a credit history. You offer a secured credit program to customers like Sally who want to build a credit history, and Sally enrolls. After you approve her application, Sally transfers $500 from her checking account into a new collateral account. She is issued a charge card against her new credit account. Later, Sally makes a payment for $100 using her charge card. At the end of her billing cycle, she is billed for the full amount, due on a specified date. If Sally pays the full amount on time, a positive record of the billing cycle is sent to the credit bureaus. Consistent positive reports build her credit. If Sally misses a payment, you can move funds from the collateral account to cover the payment. In this case, a negative record of the billing cycle is sent to the credit bureaus.

Cardholder experience

For your cardholders, the experience will differ depending on whether they already have a primary account with you or if they are signing up for a charge card for the first time.

New customersExisting cardholders
1. The customer applies for the charge card and you approve the application.
2. The customer deposits funds into a new primary account.
3. A new secured account and credit account are created.
4. The customer moves a quantity into the secured account, which serves as the credit line for the charge card.
5. A charge card is issued to the customer and activated.
6. The customer makes purchases with the card.
7. You bill the customer and the customer pays the bill every month.
8. The customer's payment activity is reported to the credit bureaus.
1. The cardholder requests a charge card and is approved.
2. The cardholder deposits a quantity into the secured account, which serves as the credit line for the charge card.
3. A charge card is issued to the customer and activated.
4. The customer makes purchases with the charge card.
5. You bill the customer and the customer pays the bill every month.
6. The customer's payment activity is reported to the credit bureaus.

Program manager responsibilities

The primary source of revenue from offering a credit product is the interchange rate from the networks. However, setting up and administering a secured credit product can be a complex and involved process, and a large initial financial investment could come into play. While Galileo can perform some tasks for you, such as account setup, processing, and credit reporting, you will need to perform these tasks:

  • Obtain approval from your partner bank for:
    • The secured credit financial product
    • A new set of credit BINs
  • Obtain card network approval for the credit BINs
  • Set up application and underwriting rules for cardholders to qualify for the charge card
  • Set up funds movement with your partner bank
  • Set up a collections method
  • Establish 3-party credit reporting contracts between the credit bureaus, your partner bank, and Galileo
  • Provide sufficient technical personnel, including a dedicated technical product manager, to administer the product
  • Train customer service representatives (Galileo offers training services)
  • Create the accounts
  • Set and adjust credit limits

Because the funds in the collateral account are not available when the charge settles, you must provide sufficient funds up front to pay the networks for each day's activity until you collect funds from cardholder billing. This "gap account" represents a considerable investment on your part.


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