As credit unions seek to build solid, sustainable credit card programs, they should focus on four areas, says Brian Scott, vice president of sales at The Members Group (TMG):
1. Recalculate your risk tolerance. Avoiding all risk is inherently risky. If less than half of your cardholders don’t regularly incur finance charges, your credit union might not be extending credit far enough.
Scott advises card managers to look beyond A-paper applicants and examine their approval policies to make sure they’re not automatically excluding consumers with less-than-perfect credit histories.
If changing your approval process isn’t an option, consider increasing credit limits for cardholders likely to take advantage of this. Cardholders generally stop using their cards once their balances reach 30% to 40% of their limits, Scott says.
2. Strike while the iron is hot. Act immediately upon the approval of a new credit card account—or risk having members never activate their cards.
TMG clients that provide plastic to approved applicants immediately see a nearly 50% increase in transactions during the first 45 days of the account. Features such as instant issuance and customization (which allows card-holders to select and change the photos that appear on their cards) also increase card use.
3. Trim the fat. Inactive accounts (those that have been dormant for six months) “can silently drain the profit-ability from even the most robust portfolios,” Scott says.
Often, card issuers place too much emphasis on achieving card penetration goals, which can prevent them from closing inactive accounts. That’s a costly mistake.
Scott advises issuers to close all inactive accounts to maintain a healthy card program.
4. Retool traditional promotions. Many tried-and-true methods for attracting new cardholders and increasing card use can create larger problems down the road.
Balance transfer promotions, for example, are effective at attracting new cardholders—but many of these con-sumers are what Scott calls “balance hoppers,” who move from one card issuer to the next.
More effective methods include promoting a low rate (rather than no rate) for balance transfers; offering re-wards cards; or providing merchant-funded rewards.
“It’s becoming increasingly important for card issuers to segregate their portfolios, identifying which accounts are transactors, revolvers, pay-downs, and inactives,” Scott says. “This allows card managers to more efficiently target their campaigns and to have a greater likelihood of building long-term loyalty.”
For more information, consult the TMG white paper, “Credit Card Portfolio Best Practices for the Modern Payments World.”