As consumer credit card holders in the United States continue to rack up increasing amounts of debt, some industry experts fear the situation may be close to a "tipping point" that could culminate a new wave of defaults and delinquencies.
Credit unions that issue credit cards would be wise to educate members about the dangers of incurring too much personal debt in a still less-than-ideal economic climate, say insiders and experts.
CardHub, a credit-card comparison website, reported last week that though card default rates have fallen to a three-decade low at 2.89%, the sheer amount of total assumed debt reflects a failure by many consumers to heed the grim lessons of the Great Recession while raising some risks of implosion.
In the third quarter of this year, consumers added a whopping $15.9 billion in credit card debt a 35% increase for the same quarter last year, according to CardHub. The website predicts that new card debt will exceed $60 billion by the end of this year—a 55% jump from last year.
"The prodigious amount of debt that we continue to rack up indicates that consumer attitudes toward money have not improved since the Great Recession," CardHub said. "The consumer debt picture has now worsened on a year-over-year basis for four straight years."
Also, worryingly, the average household's credit card balance now stands at $6,870 and CardHub expect this number to reach $7,126 by the end of the year. The website estimated that that projected balance figure is only about $1,200 away from a "tipping point at which minimum payments will become unsustainable and delinquencies will skyrocket."
So, how can credit unions — whose members held some $44.5 billion in credit card balances as of Sept. 30 — prepare for any potential meltdown in the credit card debt landscape?
Brian Scott, vice president of sales for The Members Group (TMG), a company that processes credit card payments for CUs, said that rising card balances are definitely a concern — but there are ways to avert financial disaster.
"Larger banks, which are making more money on their portfolios, can simply afford more defaults," Scott explained. "[But] to keep fees low and to service cardholders better than their competitors, credit unions really have to be analytical in their approach."
Fortunately, Scott added, data analytics are becoming more accessible to smaller financial institutions like credit unions.
"Many of [TMG's] clients, for example, have recently developed portfolio analytics strategies that allow them to head off trouble on an individual cardholder basis," he said.
For example, a CU could analyze its top 100 cardholders whose balances are within 5% of their credit limit.
"From this data set, they are then able to analyze which of these cardholders are using their credit cards for daily necessities, like gas and groceries," he said. "These are the individuals who may be in trouble. At that point, card teams can reach out to the member and advise them how to avoid deeper debt and begin to pay down their balances."
Card portfolio analytics can also be used to "optimize the profitability" of a credit card portfolio, according to Scott.
"Let's say, for instance, 30 of these [top] 100 [cardholders] are using their credit cards for luxury purchases and are supporting their daily necessities with a debit card. Not only are these individuals financially healthy, they may even be looking for a credit line increase. Extending that credit to the right individuals, based on their recent behavior, allows the credit union to generate organic growth inside the portfolio."
And this is another way CUs can separate themselves from the financial pack. "While the large banks underwrite for business, credit unions underwrite for people," Scott noted.
Default and delinquency rates have typically been higher for consumers who own bank-issued credit cards.
CUNA data found that in the first half of 2014, the charge-off rate on CU-issued cards was about 1.93% compared with 3.33% at banks. At the height of the Great Recession, the differences were even starker. In 2009, banks charged off 9.29% of their credit card balances, while credit union charge-offs were 4.29%.
Educating and Counseling
Still, CUs need to be wary of their members taking on excessive debt.
Education and counseling also play a crucial role in fostering responsible credit care management and for avoiding debt traps among members, according to industry insiders and experts.
Mike Schenk, vice president of economics and statistics at CUNA, noted that credit unions have a "long and storied" history of providing members with both financial education and counseling services.
"They endeavor to provide financial literacy education to their members, and to encourage individual and family-level thrift and saving," he stated, adding that about 70% of credit union members belong to a CU that offers some form of financial education and about 60% belong to one that offers financial literacy workshops.
"Twenty percent of credit union members belong to a credit union that operates one or more in-school branches," Schenk noted. "Credit unions engage in this activity not just through altruism, but also because it is in the best interest of the credit union to have members who are educated on how to best use the cooperative — and to use credit responsibly."
On the national front, CUNA also seeks to improve financial education.
Schenk noted that the trade group recently conducted a survey with the Consumer Federation of America (CFA) that focused on holiday shopping plans.
"In our subsequent press conference, we urged consumers to pay off debts quickly and advised them to use a lower-interest credit card -- they'll often find lower rates on credit union cards," he said. "We counsel them to avoid borrowing more for the holidays than they can repay in several months. We also remind them that credit card debt is expensive and consumers who only make the required minimum monthly payments may find that they never pay off their debts."