Tread Lightly in Card Growth Strategy
ARLINGTON, Va. -- Credit unions should continue to build their credit card portfolios even in the current economic downturn, analysts said, but they should be careful to target growth efforts.
"There has been a very strong emphasis on card growth for some time," observed Ondine Irving, a card consultant who acknowledged that she has strongly advised CUs in the past to take steps to grow their card portfolios. "I still think card growth is important, but I am unsure about whether it might be more prudent to put some card growth strategies on hold for a few months."
Irving and other analysts are concerned that consumer behavior regarding credit cards is changing during a time when the economy is slowing and other sources of liquidity, such as a home equity, have been drying up or disappearing. These changing conditions, Irving and others suggest, might make credit unions reconsider some tried and true card portfolio growth tactics like credit line increases, upgrades in the card platforms, balance transfer programs or other card marketing incentives.
"I want to stress that I am not out to rain on anyone's parade or anything, and I am not talking about abandoning these things altogether, but just letting them lay low for a while until we see how things are shaking out economically," she said.
Nationally, economists said people used to use their credit cards primarily for bigger purchases like a new television, but now that has shifted to using credit cards to meet more day to day expenses, like groceries.
According to Money Management International, a large debt counseling service in the New York City-area, one in five people have turned to credit for basic necessities. Debt counselors are noticing this trend more and more.
"You're finding a lot more people rather than using their credit cards for vacations or rental cars, something that would be more of a luxurious type, now you're seeing it for a more necessity-based groceries, to put clothes on their children's backs," said Colin Nupp of Debt Counseling Corp., another New York area debt counseling firm.
Irving worries that credit unions, which have increasingly realized the values of the card programs, could fall into a trap from this sort of card behavior if they move forward with aggressive card promotion efforts.
But other executives with CU card CUSOs and associations advised that while CUs should remain prudent about their card growth, they should keep the programs moving forward. At times like these, the executives said, such card programs could represent opportunity and even necessity as credit union members with otherwise strong credit scores found their usual credit sources drying up.
"I definitely would not favor an across the board credit line increase at any credit union right now," said Tom Chandler, director of Strategic Portfolio Consulting for PSCU Financial Services. "But I think this would be a good time for a targeted credit line increase program where a credit union looked closely and carefully at its portfolio and other metrics before moving forward." PSCU is a payments processing CUSO for more than 500 credit unions that use the First Data Corp. platform to process their transactions.
Chandler recommended that credit unions considering different card growth promotions not abandon them but, instead, evaluate them in the light of the particular membership and circumstances.
"For instance, if a CU had been considering a credit line increase for all of its card holders with FICO scores over 680, maybe they might pull that score up some and increase the credit lines for card holders over 720," Chandler said. Other tactics might include making smaller credit lines increases to lower credit scores or looking at other parameters before making a decision, he added.
Bill Lehman, assistant vice president for portfolio consulting for Card Services for Credit Unions, agreed that a targeted approach looking at a CU's individual circumstances would be the path forward these days.
"There are a number of different account metrics that a credit union could look at in making a card decision," he noted. "Credit scores would be one, but so might the length of time that a cardholder has had the CU's card, so might the use of credit overall, so might the number of other products the member has," Lehman said.
Bill Hampel, chief economist for CUNA, agreed that targeted approaches to card growth would be the most prudent course but also encouraged CUs to see their card programs as an opportunity during the downturn.
"One definition of a credit crunch is when people who would otherwise not have any problem getting loans suddenly stop being able to borrow money," Hampel said. "In those circumstances, credit unions could do a lot by stepping forward to help them, particularly when these are people who are good credit risks and will be good risks into the future," he added.
Hampel also pointed out that the impact of the downturn has not been uniform across the country. Credit unions in California, Arizona, Nevada, Florida and to some extent Michigan, Ohio and states of the upper Midwest, are in parts of the country that have borne the brunt of the downturn, Hampel said. "Much of the rest of the country has not been nearly as affected," he added.
Both Hampel and Lehman acknowledged that the economic downturn might mean that credit unions change some of their card marketing strategies. For example, in a classic case, a CU cardholder who paid their bill on time but routinely bumped up against their credit limit might have been a relatively easy candidate for a credit line increase.
But now, Hampel and Lehman said that a CU might want to take a closer look at the availability of the cardholder's credit overall to get an idea of whether this is a cardholder just chasing a lower rate in the credit union card or someone who is using their credit to meet daily expenses. In the case of the latter, Hampel said, a credit union line increase might be a bad idea.
In general, the analysts said, the current downturn provided credit unions with a mixture of opportunities and challenges in their card programs. Credit unions willing to act carefully and thoughtfully in growing their card portfolios can still find cards a useful and profitable tool to serve their members, the analysts said.