Balance Transfers Return
After dropping balance transfer promotions from their arsenals during the Great Recession, credit unions have begun offering them again.
Traditionally offered during the first quarter of the year when consumers seek cheaper rates for their holiday debts, credit unions are now defending existing card accounts from being poached by other card issuers.
“Previously during the downturn, I am sure many will remember that card offers from banks almost completely disappeared,” said Ann Farrell, senior portfolio consultant with Card Services for Credit Unions. “There were a number of different new regulatory initiatives, banks were closing accounts and raising interest rates and the low interest offers vanished. Now they’re back and credit unions have had to start paying attention.”
Balance transfer offers generally focus on transferring a balance from higher interest credit cards to another card, usually with a low balance transfer rate that could last six months or even more than a year. Farrell explained credit unions often have an advantage in this space because so many of the bank's balance transfer offers come with both explicit and hidden strings.
The explicit strings could include a balance transfer fee, which could run from 3% to 6% of the balance being moved, Farrell said. Cardholders could also lose special balance transfer rate if late with even one monthly payment.
“We have been advising credit unions not to charge any balance transfer fee,” Farrell said. She added that credit unions should consider extending the balance transfer interest rate for more than six months. The goal is to both capture the balances and strengthen the member's relationship with the credit union, Farrell explained, rather than go after the short term gain.
The $18 million, 2,900-member Lake County Educational Federal Credit Union found success with a balance transfer program. The Painesville, Ohio, organization offered its members a 0% introductory rate balance transfer offer from Feb. 1 to April 1, 2014. Over the two-month period, the credit union took in $77,000 in credit card balances from new and existing cardholders. The credit union also opened 14 new card accounts, matching the number of new accounts opened in 2013.
“We aren't a community credit union, so we have always found marketing to our membership a bit of a challenge,” CEO Miranda Puthoff said. Lake County's membership is SEG based, open to the employees of five surrounding public school districts as well as a few private schools and school affiliated organizations. The credit union is also open to students of three of the school districts, she added.
In addition, almost 25% of the credit union's membership already has its credit card, which she said makes it difficult to open new accounts. Puthoff said it wasn't clear how many of those were also top of members’ wallets. The balance transfer offer could help raise that number, she said.
Lake County used email blasts and statement flyers as well as its website to tell members about the offer, and it introduced an incentive program to reward front-line employees for cross selling the card offer. The credit union is also working on putting a 3.99% balance transfer offer into place to continue the cross selling effort into the rest of the year.
Farrell explained that having an offer more or less permanently in place meant a front line employee would be able to cross sell the offer easily, using the example of a member who might be in for a car loan.
“If a member is in working on a car loan and in the course of underwriting the car loan the representative notices they have a more expensive credit card with a high balance, the representative can offer right there to make the switch. Between the car loan and a new, lower rate card, a member could save hundreds of dollars per month,” Farrell said.
Puthoff acknowledged that the transfer balances would not initially produce much revenue from finance charges, but not all cardholders would completely pay off the transferred balance before a higher rate kicked in. And the offer would move the credit union's card to the top of the member's wallet, generating additional interchange income.
According to the credit union's March 2014 call report, one month into the campaign, Lake County Educational had 718 credit card accounts with an average interest rate of 11.00%. Puthoff said the credit union prices its cards for risk and has two principle tiers. Cardholders deemed the least risky by way of credit scores and history with the credit union pay an annual percentage rate of 9.80%. Members with a weaker credit history pay 12.80% APR. A third tier, for members who are working to build or rebuild credit, charges 16.80% APR, but those cardholders progress to a less expensive tier as they build good credit history.
Ondine Irving, a credit union card consultant and founder of the Chicago consultancy Card Analysis Solutions, said her firm supports balance transfer offers as a way of building balances. But, she urged credit unions to think strategically about the offers.
“One big problem is the very high credit line utilization I am seeing in many portfolios,” Irving said, adding that that an average credit union card credit line might be $4,800 across the whole portfolio but the average balance in the portfolio might be $2,600.
“If the average credit line across the entire portfolio is $4,800 and the average balance is $2,600, there will be a lot of cardholders out there who might qualify for the balance transfer offer but be unable to take it,” she said. She advised credit unions to review accounts for balance line increases and increase the credit lines, if appropriate, before making the balance transfer offer in order to maximize its impact.
Irving also urged credit unions to contact their credit bureau vendors about new products and services that can make qualifying members for credit line increases speedier and more efficient.