Credit Cards: Keep a Lid on Losses
Pay attention to your products, the market, and regulations to maintain high credit quality.
For many years, credit unions were criticized for having overly stringent credit card lending criteria. But nobody’s criticizing them now.
Thanks to their conservative policies, credit unions are seeing less than half the losses in their card portfolios than are banks.
“Credit quality has declined universally, especially in hard-stressed housing markets. For credit unions, however, quality is much stronger than it is for banks,” says Chris Joy, director of strategic consulting at PSCU Financial Services. “I’d say that while banks are experiencing up to a 10% loss on credit cards, credit unions are experiencing less than half those losses—4% to 4.5%.”
That’s due to credit unions’ traditionally conservative underwriting criteria, strong select employee groups, and relationships with members where both parties are more willing to come to a meeting of the minds with regard to paying off debt, he says.
“Even though credit unions look good compared to banks,” Joy adds, “they’re still hurting from an uptick in losses.”
To help credit union clients reduce losses and maintain high-quality credit card portfolios, PSCU performs in-depth reviews, looking at pricing, product, and risk management.
“We try to ‘get under the covers,’?” says Joy. “This often includes breaking down interdepartmental barriers. Usually we’ll recommend that credit unions align credit criteria and pricing for an unsecured lending product and regularly score their portfolios. That’s vital in this economy.
“We also help clients improve collection productivity,” Joy adds. “In some cases, in-house collectors treat all delinquent accounts as though they’re installment loans, not favoring one account over the other. But they should treat some accounts differently. Credit cards aren’t installment loans, and credit unions should treat them as higher-risk loans. Also, when delinquencies increase, can a small staff handle a growing workload?”
Joy says the personal touch is crucial with collections. “Banks tend to come down hard on customers while credit unions look for win-win outcomes. If a member has a declining credit score, it might be due to extraordinary circumstances, such as a medical issue or lifetime event. In many cases, a credit union can work with that individual.
“So, on a case-by-case basis, we advise credit unions to create a payment plan or workout program that meets the member halfway,” he adds. “One product that often works well for marginal credits is to offer a secured credit card. The credit union doesn’t have to reject a member outright, and it maintains close control over its risk.”
Next: Focus on retention
Focus on retention
Bill Lehman, vice president of portfolio consulting services at CSCU, says that because banks are feeling the pinch from delinquencies and restrictions posed by the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, “they’ve resorted to higher fees and lower reward limits, and are getting rid of their ‘problem children.’ So now we’re seeing a dramatic increase in aggressive acquisition campaigns by banks that are going after higher-quality prospects. Many of those prospects are credit union members.”
To fight back, says Lehman, credit unions should concentrate on account retention. “Take a hard look at the credit card programs you offer members. Are they competitive? Do they offer products that suit their market, such as platinum-level cards? Do they offer rewards and competitive rates? If all of those are in place, they can look strategically at how to retain their current base.”
One way to do that is to make credit cards a lifecycle management product. “Follow cardholders’ behaviors and stages in the life cycle,” Lehman advises. “A college student will have different needs and expectations than a newlywed, a new parent, a person at the height of his or her earning power, or somebody who’s approaching retirement. With banks offering lucrative promotional rates, credit unions have to be ready to counter.”
Next is pursuing new accounts. “Even in difficult times, credit unions should set aside the money and energy to create direct mail and other ad campaigns that tout their level of service,” says Lehman. “We need to yell from the street about that. We need to tell consumers that all the years banks were able to dump cardholders or arbitrarily raise rates—actions that are now forbidden—credit unions were always there delivering a level of service and assistance that banks never could.”
Lehman advises coupling financial counseling with collections. “Credit unions should closely monitor credit card account performance. If charge-offs or delinquencies begin to rise, they should respond immediately. This means incorporating strong, aggressive—not harsh, but proactive—and early intervention.
“The best course of action a credit union can take when those warning signs appear is to simply pick up the phone and talk to the member,” he adds. “Be ready to offer counseling, whether in-house or third-party. Usually the solution is a workout loan accompanied by financial counseling. When a credit union hangs in there in this manner for members, those members remember it for life.”
Lehman suggests contacting members when an account is 10 to 30 days past due to provide the best chance for recovery. “If you wait until it’s 120 days past due, you’re too late.”
Joy says a big reason why services from PSCU and CSCU exist is because so many credit unions set up credit card programs and then put them on autopilot. “They continue doing what they did five or 10 years ago. But the landscape has changed forever as a result of the CARD Act. Credit unions must pay attention to their products, their market, and regulations, and not do the same thing year after year.”
Next: More Data, Less Risk
More Data, Less Risk
LexisNexis has introduced a new element into credit risk management: the use of alternative data sources to improve traditional underwriting processes.
“We have much broader coverage of the population than the three bureaus,” says Grayson Clarke, the company’s senior director of credit risk decisioning. “We start with bureau heading information and build upon it with our thousands of sources. We build an individual’s profile through data such as property ownership and value, professional licenses, educational data, estimated income, and derogatory records.
“We use all of that data to build scores that either supplement what credit bureaus generate or are used on a standalone basis where limited or no bureau information is present.”
Until recently, says Clarke, LexisNexis’ Credit Risk business focused on top-tier banks. “Now that several top banks have adopted our data, we’re shifting focus to credit unions because of their desire to increase lending by supplementing their own strict credit criteria with our data.”
Clarke says credit unions have a higher burden of proof for creditworthiness, which supplementary data helps them satisfy. “We take data from random studies of millions of consumers at the time they’ve applied for credit cards, then match it against credit bureau data, our data, and subsequent performance.
“We build a custom model based on bureau data, then build a second model that uses both bureau and LexisNexis data,” he adds. “When a credit union compares the two, it sees that we have created a very defensible analysis of credit risks.”
Clarke says there are 40 million “no file” adults in the U.S.—people lenders don’t see or don’t consider eligible for credit cards. “Using our criteria, we can produce a defensible credit score on 50% of them. We can also identify the 40% of the no-file population that has a high-risk rate. This tool allows credit unions to look at prospects they might not have considered before.”
The “thin and no file” population will continue to grow, says Clarke. “If credit unions can find a way to score it and offer credit to its best risks, they can be the first to establish relationships that could last a lifetime.”