This is my first post, I have been reading the forumn for a while. I am curious as to why a bank would reject a card application for a secured card. If the borrower is able to put down cash to secure the line (say $300) and the bank knows that the person can't spend more than the $300 on the card, why would they not approve the card. It seems almost riskless from thier perspecitve. They get to make any fees and interchange associated with the card, they have the possibility that the user will graduate to a better card, and if the person defaults the bank can just keep the deposit.
If this has been posted elswhere, or should be posted elsewhere, please do not hestiate to move or delete. I looked around but couldn't find a similar question. 
The reasons why a bank might decline a secured card app are basically the same as those for which they might decline an unsecured card, just tailored to the UW standards for that product: recent delinquency, DTI too high, velocity of applications, etc, etc. That the borrower puts down a security deposit doesn't mean that a secured card is without risk to the lender any more than it does for other secured lending, e.g. auto loans or mortgages. As you point out, the security deposit does give the lender something to recover in the case of default, but that doesn't cover regular use or payments on the card. When you apply for a car loan, you have to be able to show that you can make the monthly payments with your income and aren't in financial distress b/c the bank is lending with the expectation that you will make the payments on the loan, not that they will have to repo the car in a few months. Similarly, for a secured card you have to appear to be in a good position to pay down the balances you could charge on the card, in addition to the money you deposit to secure it.
@Anonymous wrote:Intersting. It just seems bizzare that a bank would assume someone won't be able to pay 2-3% a month on what is a maximum $300 line, that's around $9 a month (plus monthly fees). Plus unlike a car loan their downside largely protected by an asset that is already in their control. The cash is literally in their own account so no additional work needs to occur to repo the collateral.
A customer that maxes out a revolving line, even a small one, and then takes 5 years to pay it off isn't what a bank is looking for; even for a secured card their UW is going to be screening for customers that they can expect to use the line relatively responsibly. You're correct that the collatoral is more accessible to the lender with a secured card than on a car loan (and depreciates much more slowly), but they still have costs to collect (labor hours for their collections department to go through the necessary legal steps and recovery of overlimit amounts are two examples) and banks are looking for profit, not loss, from their lending products. They're expecting their secured card portfolio to have more defaults overall than their unsecured cards, given the segment of credit consumers secured cards are designed for, and the higher interest rates, security deposits, and (for some lenders) fees are designed to make sure the secured card portfolio can, overall, absorb those defaults and still be profitable. There's going to be some tipping point where X number of defaults on secured cards is too many for the lender to get the returns they want; it will be a much larger number than for, e.g., the portfolio of a rewards card aimed at the top tier of credit consumers, but lenders will still want the UW standards for their secured cards to be such than the number of defaults they can expect to see on them will be under X. One of the CU's to which I belong now requires double the credit line as a deposit on their secured cards b/c they were causing them too much of a loss. X was too high before they made the change, though they chose to increase the cost passed on to the consumer and raise the acceptable threshold of X rather than tighten UW to lower X itself.
@Remedios wrote:I haven't seen large number of declines for secured cards, and I pretty much live here.
Typically, lenders that will deny opening of the secured card are the ones whose product eventually graduates.
While they are not too concerned when you're playing with your own money, they will be concerned about the future when you get to play with theirs.
My thoughts also. Particularly those banks that might automate graduation. A secured card denial could also be rooted in bust out fraud prevention.
