When it comes to managing cardholder credit limits, a proactive approach works best. Extending more credit to deserving members when they need it can help inspire their loyalty, keep them transacting, and ensure that your cards remain top-of-wallet over the long term.
“Research shows that when cardholders start approaching 50 percent of their available credit on a card, they put that card away and stop using it,” said Jennifer Kerry, vice president, credit card services for CO-OP Financial Services. “Consumers are becoming very credit savvy, and they know that staying below this threshold protects their credit rating.”
Tip #1 – Track – and Match – the Competition
She notes that the credit card industry is highly competitive, which means members are receiving new card offers on a frequent basis.
“Remember that it is much harder to obtain new cardholders than to retain the ones you already have,” she said. “With the economy improving, banks are starting to ramp up their solicitation efforts, and they are going after your member cardholders across multiple channels.”
To stay competitive, she advises credit unions to review their lending policies on an ongoing basis.
“Credit unions tend to be very conservative when it comes to lending, and this can put them at a disadvantage,” she said. “There are times when it makes sense to relax your credit criteria. Taking a more flexible approach can significantly increase your card portfolio revenue.”
She adds that one advantage credit unions hold over banks is that members are more likely to pay their cards first. “Because members typically have a closer relationship with your credit union than with a bank, they often feel more compelled to keep your accounts current,” she said.
Tip #2 – Keep Current Credit Scores
To keep tabs on member creditworthiness, Kerry recommends pulling a credit bureau report on each cardholder at least twice a year – and quarterly if possible. “And retain at least the three previous scores for future trend analysis,” she adds.
She reminds credit unions to be as detailed as possible in their examination of cardholder qualifications as the CFPB requires credit unions to look at cardholders’ ability to repay.
“Invest in data analytics to gain a deep understanding of cardholder activity, and review outside credit bureau data carefully,” she said. “Your competition likely has rooms of analysts tracking data on your members. If you neglect to provide cardholders with plenty of credit when they have earned it, they will quickly become a target.”
She notes that cardholders who consistently pay on time make solid candidates for more credit, and that high transactors who pay in full each month should also be considered.
“Volume transactors can generate a lot of interchange revenue for your credit union, and extending more credit to them can prompt them to transact even more,” she said.
Tip #3 – Congratulate Deserving Cardholders
And whenever you decide to give members a line increase, Kerry adds, celebrate the milestone with them.
“Send a letter by mail or e-mail to congratulate the cardholder,” she said. “Use this opportunity to let the member know that you value his or her loyalty – and couple it with your best promotional offer, such as a balance transfer from another card at a lower rate.”
Tip #4 – Look for Red Flags
While reviewing your portfolio frequently can help you provide reliable cardholders with the right amount of credit, Kerry notes that the process can also help you spot and track potential cardholder issues.
“If a cardholder suddenly misses a payment or has two late payments in a six-month period, the credit score will reflect this,” she said. “That member may be experiencing a financial setback. As a credit union, you have an obligation to members and a regulatory mandate to extend credit only to cardholders that demonstrate the ability to pay.”
She continued, “While dynamically managing cardholder credit lines takes time and resources, it is a very important practice to ensure the strength of your card portfolio. Taking a proactive approach and ensuring your policies remain competitive in the marketplace can help you maximize your profits. And if you find that your lending policies lean conservatively, consider loosening your criteria a bit – you may be in a position to safely take on more risk.”
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