Get Chummy With Fixed-Rate Cards in Rising Rate Environment
Members are more likely to carry a balance if they know their credit card rates are not going to fluctuate with the markets, so in this rising rate environment it only makes sense to offer a non-variable rate product. Considering approximately 70% of credit union credit card program revenue comes from finance income, fixed cards can be a real boon to your program.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 sent shock waves through the industry, introducing changes and uncertainty into the market that prompted the vast majority of credit unions to switch to variable rates. Prior to that, 90% of credit unions offered card products with nonvariable rates. Only 20% of credit unions today offer a non-variable rate card.
Unfortunately, when credit unions made that shift, they lost the key advantage they had over bank-issued credit card programs: Offering lower nonvariable rates. Conversely, bank-issued card programs generate 70% of their card program revenue from interchange and fees; they are more focused on building usage than loan growth. Banks have left the non-variable market for credit unions to own and build their loan portfolio balances.
If you’re apprehensive about moving from variable to non-variable rates, start with this: The rewards program should remain variable as those cardholders are less rate sensitive. The nonrewards program should offer a non-variable rate to attract balances. This strategy gives your members options.
Keep in mind, nonvariable does not mean the rate is carved in stone. At my Schools of Credit Card Program Management, I frequently poll attendees on how often they score cardholders for risk. About 75% do not consistently score their cardholders at reissue! Credit unions are placing too much emphasis on managing the risk of the portfolio according to the economy, without giving due consideration to the members’ credit score.
Credit unions routinely scored cardholders with every reissue before the CARD Act, a practice known as risk-based pricing. If the member’s score changed, credit unions would adjust the rate for new purchases and balances accordingly, while grandfathering older purchases and balances at the previous rate. This practice was a common practice 10 years ago, however, very few credit unions are actually using risk-based pricing today. Scoring cardholders at reissue not only helps credit unions better assess their risks, but it also presents the perfect opportunity to change the rate should the business case call for it.
If you are not monitoring a cardholder’s score on a regular basis, you are not risk-based pricing. Ask your lending department now if you score cardholders at reissue. You may be surprised.
Cardholders expect to be scored and, in many cases, want to be scored. For example, if a member has worked hard to maintain a great credit score, that member expects to be rewarded for it with a lower rate. And if cardholders have damaged their credit in some way, they understand and accept that their interest rate may rise.
Ultimately, while the right non-variable rate card can help credit unions build revenues, profits and cardholder loyalty, it is important to remember that the interest rate is just one factor in the success of any card program. Profitability is also affected by charge-offs, appetite for risk, processor costs, fee income and marketing expenses. To maximize your card program’s potential, you need an all-encompassing method for managing the various factors.