Secured Credit

Galileo clients who want to offer their customers a credit card can use Galileo's secured credit product. Secured credit is an alternative to revolving credit that provides issuers with entry into the credit space without establishing themselves as lenders.

With a traditional revolving credit account, the card issuer lends purchase amounts to the cardholder, who pays back the billed amount either all at once or in increments. The unpaid balance from previous months carries into the next month, which is why it's called "revolving credit." Issuers of traditional credit cards typically require that cardholders already have a good credit rating before issuing them a card.

With secured credit, the cardholder must first deposit funds into a separate account, and those funds provide collateral for the credit account. The issuer is therefore not a lender. Cardholders must also pay off the full balance of each month's activity instead of carrying a balance into the next month. For this reason, the card is more accurately called a "charge card" than a "credit card." However, the card is considered a credit card by the card networks and by merchants.

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Note

This guide provides an overview of secured credit products at Galileo. Clients may request additional documentation with detailed configuration and implementation steps from Galileo.

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.
  • Car rental agencies and similar businesses do not accept debit or prepaid cards, but they do accept credit (charge) cards.

Cardholder experience

For your cardholders, the experience will differ depending on whether they already have a DDADDA - Demand deposit account. The banking-industry term for an account from which funds can be withdrawn at any time, such as a checking account. with you or if they are signing up for a charge card for the first time.

New customers

  1. The customer applies for the charge card and you approve the application.
  2. The customer deposits a quantity into the secured account, which serves as the credit line for the charge card.
  3. You issue the card to the customer.
  4. The customer makes purchases with the card.
  5. You bill the customer and the customer pays the bill every month.
  6. You report the customer's credit activity to the credit bureaus.

Existing cardholders

  1. The cardholder requests a charge card.
  2. The cardholder deposits a quantity into the secured account, which serves as the credit line for the charge card.
  3. You issue the card to the cardholder.
  4. The customer makes purchases with the charge card.
  5. You bill the customer and the customer pays the bill every month.
  6. You report the customer's credit activity to the credit bureaus.

Issuer risks and rewards

For the issuer, the primary advantage of 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. For all secured credit products, you will need to perform these tasks:

  • Obtain bank approval for:
    • The secured credit financial product
    • A new set of credit BINs
  • Obtain card network approval for the credit BINs
  • Set up underwriting and cardholder qualifications
  • Set up funds movement
  • Set up a collections method
  • Set up credit-reporting metrics
  • Provide sufficient technical personnel, including a dedicated technical product manager, to administer the product
  • Create customer service training
  • Create the accounts
  • Set and adjust credit limits
  • Set up a method for setting a PIN for the card, because cards without PINs cannot be used at ATMs

Overview of secured credit accounts

To create a secured credit account, you start with a conventional DDADDA - Demand deposit account. The banking-industry term for an account from which funds can be withdrawn at any time, such as a checking account. and add to it a secondary collateral (secured) account and a charge card 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.

Advantages

  • For cardholders, this method will help them establish good credit, depending on how much of their credit limit they spend each month. A cardholder with a $1000 credit limit who spends only $200 per month has a 20% utilization rate, which the credit bureaus would regard as favorable.
  • For you, this method is easier to administer with regard to setting and maintaining the credit limit, because the amount in the collateral account will not change very often.

Disadvantages

  • Because the funds in the collateral account are not available for other uses, 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.
  • If the cardholder wants to access the collateral funds, they must make a request to move funds back to the DDA, which lowers the credit line.

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