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No single action can turn a credit union card issuer’s program around and make it profitable, since an ailing program has taken years to get that way. A first step, however, is to focus on the credit lines. Credit line management is an area of credit card management that has the greatest impact on the cardholders and influences their usage of the card. It is also one of the most effective ongoing risk control tools available to the issuer. You may be surprised to hear that the average credit line among credit union cardholders is more than $2,500 less than the industry average. The reason for this is that a combination of overly conservative policies and a lack of attention to management of their members’ credit card credit lines is hurting too many credit unions. They are letting revenue – especially from their lowest-risk cardholders – slip through their fingers. One look at national average figures for usage, outstanding balances, and utilization shows the weak position that this has created for credit unions compared with other card issuers. According to the Credit Union National Association, while the average balance for all Visa and MasterCard accounts nationally was $2,837, the average balance for credit union Visa and MasterCard accounts was $943 – just one-third as high. One of the prime reasons for this disparity is the unnecessarily low credit lines that are in place at too many credit unions. These credit lines are often out of date, and fail to reflect the changing nature of credit card usage over the past decade. While conservative policies have made credit unions strong in many ways, these policies also need to keep pace with the way the industry has changed. Ten years ago, consumers used their credit cards in such a way that a $2,000 credit line might have been acceptable for many cardholders. But now, with increased spending and greater reliance among consumers on card usage, a credit line like that is too restrictive. The answer for credit unions is to take a hard look at the credit lines in their card portfolio. But how do you increase credit lines without adding risk? The approach we recommend is to establish tiers. The credit union should pair with credit scores its choice of criteria (such as consumer behavior, delinquencies, credit history, or payment performance) to create tiers. Cardholders with the highest credit scores and other proof of low risk – the Tier One members – get the biggest credit line increases. Moving down through the tiers, the percentage of credit line increase lowers, and in the lowest tiers (the highest-risk cardholders), there is no increase at all. Once established, these tiers should be reviewed annually, or at the very least every two years upon card renewal. One credit union that began this process in mid-2000 saw tremendous success within a year and a half, and has held onto its gains since then. At that time, it had 2,342 card accounts (70% active), with an average credit line of $3,541. Average usage of the credit line was 29.9%, and the average outstanding balance was $1,514. By the end of 2001, after lifting its average credit line to $4,738, this credit union was seeing 34% of that credit line used on the average, and the outstanding balance average had climbed to $2,455, more than a 60% increase. It added 460 card accounts in those 18 months. By the end of 2003, while continuing to review and upgrade credit lines, the credit union built upon its progress. It had 2,736 card accounts (73% active), with an average credit line of $5,219 – approximately 50% higher than three years earlier. Its average usage of the credit line was steady at 34%, and its average outstanding balance stood at $2,406. This is an excellent example of a well-managed credit line strategy. No credit union will be able – or should even try – to correct its credit line shortcomings overnight. But credit unions clearly must begin migrating in that direction. The goal is to enhance your cardholder offer without significantly increasing risk. The primary objective for any credit union should be to enhance the share of income it is receiving from the lowest-risk cardholders while managing risk among higher-risk members. When credit line increases are done correctly, the people who will see the greatest benefits will be those low-risk individuals. What has happened through the years, unfortunately, is that many of these low-risk cardholders have migrated away from credit unions in part because of their low credit lines. They have moved much of their credit business to companies that attracted them with higher credit limits, lower-rate cards, platinum status, and other enticements. In many cases, the people who stayed with the credit union have been the higher-risk ones. As a result, credit unions’ risk tended to increase as the overall profile of their card portfolio changed. Greater flexibility in credit lines is a proven way to retain the low-risk cardholder and attract new low-risk cardholders. With consistent management, an approach like this should reduce overall risk across the portfolio. If a credit union wants to further strengthen its portfolio, bundling other promotions with the credit line increase adds to its effectiveness. An example of this is offering a low-rate balance transfer to encourage cardholders to move outstanding balances from other cards into the credit union’s program. With the higher credit line, cardholders have the room to transfer these balances. Typically the low transfer rates will disappear after six months or a year, and then the remaining balances revert to the higher rate. Raising member cardholders’ credit lines only works if they know about it. A credit union can choose to notify them either through a statement message or a separate notification. With the lowest-risk groups, a separate mailing or notification is most effective. A credit line increase can be a powerful tool, but it is only one of several tools that a credit union must use when it sets out to turn around a stagnant portfolio. Just as no one can complete a journey by taking just one step, a credit union can’t expect impressive results using only credit line increases. Implementing closer management of the credit card portfolio, along with well-targeted promotions and other appropriate strategies, will build and maintain the strong portfolio that every credit union would like to see.

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