On August 18, the Federal Deposit Insurance Corporation (FDIC) added the Public Savings Bank of Huntingdon Valley, Penn., to its failed banks list. It’s always sad when any bank fails, but this event was more tragic than most, because this Public Savings Bank issued one of the best secured credit cards around.

Secured credit card at risk?

On the same day, Capital Bank, N.A. of Rockville, Md., (no relation to Capital One Bank) announced that it was “to assume all of the deposits of Public Savings Bank.” However, the future of the failed bank’s credit card business is unclear. At the time of writing, the card’s website says:

Thank you for your interest in the Open Sky Secured Visa® Credit Card. At this time Capital Bank has stopped accepting new applications for the secured card product. We have not discontinued the product and this is a temporary action as we work through efficiencies related to the acquisition of the program from Public Savings Bank.

Reading between the lines, there’s a notable lack of any bankable (if you’ll forgive the pun) commitment there to the product’s future, although perhaps enough reassurance to keep existing customers from panicking.

Why secured credit cards are important

This is the second heart-stopper for fans of secured credit cards in less than a month. HSBC’s excellent secured products seemed similarly threatened right up until Capital One bought them a couple of weeks ago.

Secured products can be highly effective vehicles for those who can’t get approved (because their credit reports are either patchy or non-existent as a result of financial problems or extreme youth) for mainstream, unsecured credit cards. Generally speaking, cardholders have to deposit upfront a sum, often $300-$500, in a savings account, certificate of deposit or similar, which then becomes their credit limit.

However, the best secured credit cards (not all of them) report activity to the three big credit bureaus, which gives cardholders a chance to build or rebuild their credit. And, after some months or years of responsible behavior, many issuers are willing to replace the plastic with a normal unsecured credit card.

Credit card companies and subprime borrowers

This represents an important opportunity for those whose credit card applications for mainstream products are likely to be declined. Many subprime borrowers have found their credit reports damaged through no fault of their own, perhaps as a result of illness or an unexpectedly long period of unemployment. Their problems are often short-term, and may now be entirely behind them. They deserve a second chance.

At a time when many credit card companies are again irresponsibly issuing plastic to risky subprime borrowers (see Credit card lending: bring on the tripping goldfish), there surely should be a greater role for secured cards. They can help and protect borrowers, lenders and the economy.

Published 08/30/11 (Modified 05/25/12)