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Although most credit unions experienced positive returns on their credit card portfolios in 2008, today’s uncertain economic conditions warrant a review of risk management policies. Managing credit risk is an ongoing process, but rapidly changing market dynamics demand a more proactive approach to assessing risk.As the credit card issuing partner for 160 credit unions and processing partner for 550 credit unions overall, TNB Card Services manages a large credit card portfolio. Through our risk management expertise, we are able to share best practices credit unions can adopt to better manage their exposure.Review credit bureau and bankruptcy scores frequently. Assessing the credit and bankruptcy scores of your portfolio provides insight into the risk you hold. Instead of scoring cardholders on an annual or semiannual basis, review scores more frequently to ensure you have an up-to-date risk exposure profile. In difficult economic times, such as these, scores tend to decline, so monitoring scores more often enables you to proactively manage risk tolerances and limit losses. Analyze the data, identify trends and take appropriate action where necessary to align your portfolio with your credit-risk policy. Before taking action to reduce credit lines or reprice a cardholder’s account, evaluate the cardholder’s history along with their recent scores.Carefully manage credit lines. Credit lines should reflect credit and bankruptcy scores. Consider reducing credit lines of inactive accounts, especially those posing high or unacceptable credit risk, or closing the account if the credit score of the cardholder falls below your risk threshold. Cash line availability also presents a significant risk if not monitored carefully. Evaluate reducing risk exposure by limiting cash advances as a percent of the credit line for less creditworthy accounts. Large cash advances can be an indicator of cardholder financial distress.Diligently review risk management reports. At TNB, our team reviews portfolio risk on a daily basis. By constantly monitoring cardholder behavior and using that knowledge to manage accounts, significant reductions in risk can be achieved. If your credit card program management resources do not allow for daily reviews, step up the frequency to at least a weekly review.Live within your authorization parameters. In good economic times it isn’t unusual to let your cardholder exceed their credit limit from time to time. In today’s market, tightened authorization strategies are key to managing risk. Link strategies to behavioral scoring to ensure that your most profitable and valuable cardholders have some flexibility in their spending. For riskier accounts, consider more restrictive authorization policies.Monitor cardholders who have historically high credit utilization and repeatedly go over-limit to assess risk mitigation measures that may be necessary.Reach out before collection is necessary. Advanced intervention on high-risk accounts will improve collection results. Early detection of issues consumers may be facing provides more flexibility and options in working with cardholders, which will decreased delinquencies in later cycles and reduced charge-offs. This approach can also improve cardholder service, providing the opportunity to talk to cardholders and enroll them in convenience services, such as recurring payment programs.Credit unions of any size can apply these same risk-management strategies to keep their portfolios healthy in 2009 and beyond. With many members in financial distress, a review of credit union risk policies and practices is a prudent action to ensure a healthy credit card portfolio.

Peter Westerman

Credit Union Times

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