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