Is the rise of 'poor credit' reward cards worrying?
THE idea of a credit card that helps to rebuild up a damaged history while offering rewards would have once been laughable.
Yet, over the past few months, more and more cards have come on to the market that claim to do just that.
Is this a worrying trend?
After all, 'poor credit' cards are supposed to give people with credit problems in their pasts an opportunity to demonstrate moderate, cautious borrowing.
Rewards cards offer just about the exact opposite: they want users to borrow as much as possible.
Rebuild and reward
If combining those two features looks a little wrong headed from a consumer point of view, however, it makes perfect sense from the card providers' perspective.
Credit scores are pretty important.
Mortgages, phones, car loans all rely on credit providers being able to trust borrowers to meet their repayments.
However, improving a credit score is a fairly vague benefit.
There's no single credit scoring system so borrowers can't track their improvement in the form of a simple number and even if they go out of their way to do that through a reference agency like Equifax it won't guarantee successful applications.
As the 'poor credit' market has steadily broadened over the past few years such intangible benefits have lost even more value - after all, if your aim is just getting a credit card any one will do - and more clearly defined rewards have become more important.
As more people find themselves drawn towards this market and moving not just into it but within it, offering rewards is one way for financial providers to distinguish themselves.
However, what's good for the card providers isn't always good for their customers.
Offering poor value?
The market has been dogged by claims that the rewards on offer alongside credit rebuilding deals are poor value for money.
Critics cite several potential problems with the market.
Low earning potential
To earn big with reward cards, you have to spend big.
But cards for those starting out in or returning to the borrowing market come with credit limits as low as a couple of hundred pounds.
Those credit limits seriously restrict earning power.
For example, the Aqua reward card, owned by SAV credit, is offering 3% cash back on all spending capped at £100 a year.
To get that maximum amount, cardholders must spend at least £300 a month, potentially, the card's entire credit limit.
Lurking within the criticism above is another potential problem.
There's a case to be made that rewards schemes of all kinds encourage spending and that in the case of credit rebuilding cards that encouragement is being given to vulnerable consumers.
This is a topic we've covered in depth in relation to proactive marketing: the practice of offering short term rewards for borrowing.
There's no evidence that consumers in this market are receiving those type of rewards in addition to the formal schemes they sign up to when making the card application.
However, it could be argued that some cards encourage vulnerable consumers to sign up and spend beyond their means by offering a similar form of short term reward: a short 0% purchases period.
Poor value retail discounts
Retailer discounts are also problematic.
For reasons we've looked at in more detail here cardholders are able to get discounts from big name retailers.
Most often, these discounts aren't exclusive to those wielding that particular card, incur a minimum spend and aren't offering the best value for money in the market.
Claims that rewards in the credit building market are uniformly poor value are, however, overblown.
Even constricted by a small credit limit, some of the earnings on offer are significant.
The 3% cash back rate with the Aqua card we mentioned, for example, is more than double the standard rate of return we'd typically expect from cards at the very top of the market.
Similarly, poor value rewards, like retail discounts, are present at every level of the UK credit card market.
The worthless purchase protection deals offered by cards that require an excellent credit history are a good example.
Filling a gap
Finally, it's increasingly unfair to characterise those with credit building cards as particularly financially vulnerable.
A study from Levell and Oldfield last year found that 69% of low income households - 10.55 million people - are credit users.
However, many of those people are unable to access the mainstream credit market.
In 2010 the Office of Fair Trading (OFT) said that the high cost credit market had shown substantial growth in recent years.
Payday loans have seen the fastest growth but there has also been growth for home credit providers and pawnbrokers, the OFT said.
While many factors have contributed to that growth, a big one is that those with the lowest incomes and, often, the most poor credit history simply aren't able to access the mainstream market.
It's those people who once would have thought of themselves as very mainstream credit users - with middle incomes, good financial literacy and without really big problems such as major debt or bankruptcy in their histories - who have 'downgraded' to fill the poor credit space.
In other words, it's not so much that those with sub prime deals are no more at risk than those in the mainstream but more than many of them are the (old) mainstream.