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Popping the Consumer Debt Bubble Before It Bursts

Popping the Consumer Debt Bubble Before It Bursts
Posted: Oct 5, 2017
Categories: Credit Cards, Marketing
Comments: 0

Philadelphia’s American Heritage FCU offers a parachute to members in need

When it comes to the record growth of consumer debt, many questions come to mind. What do we know? What can history teach us? What should a credit union do to keep their members safe? According to Federal Reserve data, total U.S. credit card debt has reached $1 trillion, surpassing a previous mark set in April of 2008 just before the Great Recession. For households that carry credit card debt, the average amount per household is now $9,600, which equals 17 percent of an average U.S. household income. The average interest rate on a credit card is 16 percent, and about 24 percent for those with subpar credit, that debt grows between $1,600 and $2,300 each year. Yet, despite growing household debt at potentially increasing interest rates, most Americans appear to be optimistic about the future due to the stable economy and low unemployment. Unfortunately, all it takes is one major set-back in the way of a job loss or major medical situation to turn the tide and create problems for consumers with high credit card debt.

 What opportunity does this pose to credit unions?

Education, financial literacy and debt management is paramount and credit unions are perfectly positioned to provide this to their members. While it is important to continually offer guidance about how to use credit cards, credit unions can make a bigger impact for their members by taking a more member-centric approach. By offering a parachute for members in times of hardship, credit unions will create a huge differentiation in the marketplace.

 What is happening today to educate consumers?

In the market place, today, some large credit card issuers are offering forms of financial education on their websites to educate consumers on how to manage their credit card debt and how to use credit cards responsibly. While these programs are useful and should be part of an education strategy, they don’t offer assistance to cardholders who have high debt and struggle to make their minimum payments.

Currently issuers do not actively contact cardholders in this situation. Instead, the onus is on the cardholder to contact the financial institution and request a payment plan. Many large issuers require a financial statement and only if the cardholder is approved, will they grant them a lower monthly payment, in exchange for the closing of their line. The rate will stay the same and the member may still be facing many years to pay off their debt depending on the amount.

 American Heritage FCU takes a member-centric approach

How about taking a different, more member oriented approach? This is exactly what American Heritage FCU in Philadelphia did, choosing to be there for their members through the good times and the bad. “We don’t want to be like the big issuers who shut down lines for people in downturns. Instead, we want to be there for our members through their hardships to help them see the light on the other side,” stated Bryan Eichenbaum, Vice President of Lending at American Heritage FCU.

Helping members see the light on the other side of high debt

A couple of years ago, American Heritage decided to take a closer look at their credit card portfolio, specifically their credit lines. They went back to their service bureau and did an account review of all cards to look at those with high balance debt that weren’t being paid down. They also looked at any changes to the cardholder’s FICO score and income (based on the bureau’s income estimator). What they found was a large amount of long standing, loyal members who carried a lot of credit card debt, many of whom were struggling to make their minimum payments.

Eichenbaum said, “We had choices to make and we chose a very mission oriented approach. We decided not to just remove the limit on the member like other financial institutions would do. Instead, we reached out to our members via a letter and offered them the opportunity to migrate their credit card debt to a lower rate term loan. This would allow them to pay off their debt with a similar payment amount in less time than the possible thirty years it could take them just making minimum payments.”

The response was tremendous, they received a 24% response rate in the first wave of members that were contacted, said Eichenbaum. Some members qualified to keep a small credit line, allowing them to still have the card when they paid it off. The credit union has been doing this for a little over a year and the charge off ratio remains low on this group of members.

In addition, the credit union partners with a third-party firm who provides financial literacy and debt counseling to their members in need and many of their members have taken advantage of this service.

Putting members before profits

This exercise of putting members before profits, brought to their attention the fact that the credit union had a large group of members who had retired or tried to retire on less income and experienced a large decrease in their household income. It fit with the credit union’s mission to reach out to these members who had been loyal for many years and offer a helping hand rather than turn a blind eye to their hardship.

 “When members go through a hardship it’s how you react to it that shows the depth of your compassion and what your mission is, said Eichenbaum. He went on to share that mission… “to provide their members with the services they need along with advice and guidance you typically don’t see anywhere else.”

American Heritage FCU had a credit card portfolio of approximately $110 million when they began and it decreased by approximately 12%, as a result of the program. Ultimately, it was all worth it because they felt it was more important to put their members before profits. Ask yourself…would a large financial institution take that same people-helping-people approach?

 

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Michele Featherstone

Michele FeatherstoneMichele Featherstone

Trellance Senior Portfolio Consultant Michele Featherstone brings more than 20 years of industry experience working as a strategic marketing consultant with credit unions of all sizes. Prior to joining Trellance, she held a senior leadership position at a Trellance partner credit union, where she w

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