Chime, Varo, GO2bank secured credit cards: Is there a catch?

Credit where it’s due

About one in six Americans has a subprime credit score, according to the CFPB. Another 23% have too thin a credit file to score, or no file at all. It puts them in a credit trap: To build credit, these consumers need someone to give them a line of credit with which they can demonstrate good financial habits. But with such low scores, few lenders are prepared to offer them anything.

Neobanks says it can solve the problem through a new twist on secure credit cards. But regulators are already scrutinizing their offerings.

• Secured credit cards have been an answer to the problem of thin credit for decades because they allow subprime borrowers to open a line of credit when they otherwise could not by putting up cash up front. Most require several hundred dollars as a deposit and charge high interest rates and fees, which low-income borrowers struggle to afford.
• Neobanks such as Chime, Varo and GO2bank say they can avoid these problems with cards that allow customers to pay back credit balances directly using the deposited cash, rather than keeping the money set aside.

Some in the industry see red flags. “They are, functionally speaking, prepaid credit cards,” fintech analyst Alex Johnson told Protocol.

• It raises concerns that neobanks could help users boost their credit scores with a tool that doesn’t actually indicate their ability to repay. “If I were a lender, I’d be pissed off to have to resolve the trade lines in these consumers’ credit files to make sure I wasn’t mistakenly extending credit to high-risk applicants,” Johnson said.
• Chime, Varo and GO2bank’s secured credit cards each have similar mechanics: A user moves money from a checking account to a separate credit-building account, and the amount they move determines their credit limit. Users can then pay off their credit card balances with the money they have deposited.
• Varo and GO2bank told Protocol that it is the third step – having to pay off the credit card at the end of the payment period – that makes the card a credit card, not a prepaid debit card. Late payment or non-repayment can damage users’ credit scores. GO2bank additionally charges up to $39 for a late payment. Chime declined to respond to questions for this story.

The CFPB can view such cards. The agency acknowledged Varo’s and Chime’s secured credit building products in its 2021 consumer credit card market report without mentioning whether the products might merit further scrutiny.

• Protocol asked the agency for an update on its views. A spokesperson said that “the CFPB is aware of these market developments and we are monitoring this issue closely.”
• To consumer advocates, the ambiguity surrounding such programs is symptomatic of a larger problem: The CFPB has yet to fully bring neobanks under its regulatory purview. Under the law that created it, the agency can supervise participants in consumer financial markets who work in consumer reporting, collection or servicing of certain loans. The agency invoked a dormant authority to investigate non-bank fintechs in April.

A crucial question is whether consumers understand what they are getting into. Abhijit Chaudhary, head of product at GO2bank’s parent Green Dot, said the company is over-communicating, if anything. “Sometimes we get annoying, but it’s extremely important to make sure our customers know when their bill is due, when they need to pay, and that we do everything we can to ensure they can at least make the minimum payment and not become delinquent ,” he said. Consumer advocates are on alert, and the CFPB is watching.

— Veronica Irwin (e-mail | twitter)

A version of this story appeared on Protocol.com. Read it here.

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