“Generally, credit unions have the most consumer-friendly credit card offerings in the market,” says Mike Gulledge, director of Advisors Plus, an external consulting arm of PSCU. And despite Credit Card Accountability (CARD) Act provisions and the recession, he adds, they continue to do so.
Gulledge says those two factors have driven the credit card industry to make substantial changes in three key areas:
1. Product structure—risk-based pricing arose in response;
2. Underwriting processes; and
3. Credit line assignment processes.
“In product structure, risk-based pricing has shifted old credit card levels from regular, gold, and platinum—with corresponding low to high credit lines and benefits—to platinum across the board. The differences now are what interest rates and credit lines go with a card product.”
The CARD Act also has pushed credit unions into variable-rate pricing linked to the prime rate versus fixed-rate pricing. Variable-rate pricing allows issuers to re-price balances on the fly because rates are tied to a reliable index.
Fixed-rate pricing doesn’t allow this flexibility.
“Credit unions still prefer fixed rates, but have had to make the move to variable,” Gulledge says. “However, unlike banks, they’ve been good at taking great pains to explain the shift to members.”
The bottom line effects have been good.
“Charge-offs peaked in the first quarter of 2010, with banks at more than 10% and credit unions at around 4%. Charge-offs and delinquencies currently are trending down substantially: 2011 figures show banks at 5.7% and credit unions at 3.74%.”
Stanching charge-offs has come from recalibrating risk tolerance and focusing on higher-scoring accounts.
“Credit unions were once comfortable with a range down to 640. Now, that figure is 680 to 700,” Gulledge says.
They’ll still serve members with lower scores, he says, but only those with whom they’ve had long-lasting relationships.
The “tiering” of credit lines allows credit unions to establish a separation between lower and higher lines of unsecured credit.
“It’s a balancing act between reducing risk and staying competitive,” Gulledge says.
He advises three best practices:
1. Actively manage risk profiles in credit card portfolios. Focus on higher-scoring accounts and limit taking on higher-risk accounts.
2. Conduct underwriting audits. Sample your approved and declined accounts and validate that the right decisions were made. Also, evaluate credit lines to see if they’re appropriate and competitive.
3. Use scores. The cost of getting scores can be recovered by avoiding one charge-off.