Discussion Paper

Top of the Class Assessing the Credit Performance of Graduates from Secured Credit Card Programs

Abstract: Secured credit cards, whose limit is fully or partially collateralized by a bank deposit, serve as viable options for consumers seeking to build new credit or to repair a damaged credit history. Demonstrated repayment behavior over time can qualify secured cardholders for “graduation” to a standard unsecured credit card. This paper uses anonymized account-level data to examine how secured card borrowers perform after graduation by matching samples of graduates with similar groups of borrowers who open new unsecured cards without having graduated from a secured card program. Using a regression model, we compare the two groups’ credit usage and repayment behavior over time and assess the success of secured card graduates in establishing or rebuilding credit. Overall, we find that many secured card graduates succeed in demonstrating long-term responsible credit usage and are generally not riskier in their credit use than their comparison group.

Keywords: credit cards; secured credit cards; account graduation;

JEL Classification: D14; G21;

https://doi.org/10.21799/frbp.dp.2024.02

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Consumer Finance Institute discussion papers

Publication Date: 2024-11-26

Number: DP24-02