Starter Credit Card: A Monetary Tool Used by Banks to Help Youths Become Financially Independent

Key Takeaways:

• Introduction
• The benefits offered by starter credit cards
• Innovative product launches by banks and financial corporations

During the COVID-19 pandemic, many companies and enterprises had to shut down their businesses due to which the global economy entered a phase of recession. As a result of the social distancing norms and lockdowns, the supply of raw materials was hampered, which disrupted the delivery of the final goods to the intended consumer. On the other hand, as the purchasing power of people reduced, the demand for almost all consumer goods declined. To come out of this phase, many economists and expert policymakers recommended increasing the liquidity in the economy to boost the disposable incomes of people and revive the demand for different consumer goods.

To implement the economic policy of increased liquidity, banks have deployed various monetary tools such as credit provisioning schemes, interest rate reduction, and restructuring outstanding loans to help businesses restart their operations. At the individual level, banks emphasized increasing the penetration of starter credit cards to enable the youth to become financially independent.

Starter credit cards for helping students build a positive credit history

A starter credit card is a type of credit card that is designed for people who have little or no experience with banking transactions and hence do not have any financial history. Thus, these cards act as the first step for an individual looking to build his/her credit background, so that he/she can apply for a regular credit card in the future. Generally, there are three types of starter credit cards, viz., secured, unsecured, and student.

A secured credit card, as the name suggests, requires a security deposit that acts as collateral for the credit limit. This aids in reducing the risk to the lender in case the card user fails to repay the dues. Unsecured credit, on the other hand, doesn’t involve any security deposit and each month a financial statement reflecting the balance and dues is provided to the cardholder. Student credit cards are typically offered to students who are yet to enter formal banking channels. Along with cash credit, student cards sometimes also offer rewards or points through shopping on e-commerce websites.

As said earlier, the main purpose of starter credit cards is to help those who have no formal banking experience to avail themselves of the benefits of credit cards. Hence, sometimes these cards are also called beginners’ credit cards. These cards do not require any specific credit score and have very lenient income qualification requirements. Thus, students who have just completed their education and started to earn can easily apply for beginners’ cards.

Moreover, starter credit cards allow students to report their financial history to credit rating bureaus such as TransUnion, Equifax, and Experian. This, in the long run, reflects positively on the individual’s credit score and thus, makes it easier for him/her to apply for a regular credit card with higher spending limits. Studies in behavioral economics have shown that credit cards aid in imbibing financial discipline in the cardholder. Thus, students can set their fiscal goals and develop positive spending habits, which ultimately makes them financially independent.

AU Small Finance Bank and IDFC First Bank to launch credit cards with exclusive features

The starter credit cards industry has witnessed huge growth in developing countries like India. For instance, in December 2023, IDBI First Bank, an Indian private sector bank, announced that it was partnering with Mastercard to launch a credit card specifically designed for the Gen Z generation. Called the FIRST SWYP Credit Card, it offers various EMI benefits to the user and focuses on affordability and convenience for enhanced customer engagement. It also provides several offers and discounts on popular food & beverage and entertainment brands.

Similarly, in April 2024, AU Small Finance Bank, a commercial banking company in India, unveiled the NOMO Secured Credit Card. Backed by a fixed deposit, the secured card is developed in partnership with VISA and NPCI and offers customized solutions to medium and small-scale enterprises. The product launch is expected to help the company address the demands of its customer base in a much better way.

To conclude, the growth of the starter credit cards industry is attributed to the growing shift of banks and financial institutions toward financial inclusion. The rising need to increase the money supply in the global economy to tackle recession has played an important role in the expansion of the landscape. The various advantages offered by starter credit cards have made them quite popular, especially among the youth globally.

For more insights into the growth drivers and investment opportunities in the industry, feel free to contact us.

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