WASHINGTON — While many banks are concerned about risk returning to the credit card marketplace, their credit union counterparts do not share those fears.
Banks expect to issue more plastic to consumers with blemished payment histories, higher credit losses for card issuers and a greater reliance on those who use their cards to borrow rather just to earn rewards, according to industry analysts.
But credit unions will continue to play it safe on the subprime credit card front.
"Credit unions do not have the same incentive to reach for profit that banks do," said Doug Christman, NAFCU's staff economist. "When the recession happened and delinquencies spiked up, credit unions did not have the same negative impacts as banks because they had not pursued subprime borrowers."
Since 2007, CUs have been increasing their card market share while banks have been declining, according to Christman, who noted that CUs are counter-cyclical lenders — when credit gets tight at banks people go to credit unions.
Since the recession, credit unions have increased both numbers of accounts and dollars. In 2008, Christman said federally insured CUs had $29.7 billion in credit card loans. That figure was $44 billion in the third quarter of 2014.
"I cannot say if all of these are to people with good credit, but it seems likely because credit unions are less likely to reach out to people with bad credit just to get the money," Christman said. "Credit unions do not like putting their members is bad positions."
Mike Schenk, V.P. economics and statistics for CUNA, said the numbers support the argument that credit unions manage credit cards better than banks.
"Because credit unions are not-for-profit, the incentives they have to make inappropriate loans are not there, as they are for some other issuers," said Schenk. "Credit unions are very careful about the loans they make to their owner-members."
Charge offs at credit unions are "significantly lower" than those of banks, Schenk pointed out, and were so even during the economic downturn.
"I am confident that the activity we are seeing now reflects a healthy and improving economy, and that credit unions are behaving, as they have historically, in responsible, consumer-friendly ways," said Schenk.
Brian Scott, VP of sales for The Members Group, said up until very recently credit unions have been ahead of banks in issuing credit cards to their members — simply because most CUs never really stopped issuing cards during the financial crisis.
"Credit unions tend to be more risk averse, so by and large they were not entering the subprime market to the scale that banks were," said Scott.
When the financial crisis hit, Scott noted, CUs were "not as impacted" as banks.
"Because they were not as impacted, most credit unions continued their steady trend of issuing cards and growing their card programs. This includes growing credit through credit line increases and growing balances through continued balance transfer promotions — with most balances coming from banks that stopped issuing credit."
TMG's Scott said he does not anticipate CUs will enter the subprime market now or anytime soon.
"It is just not in the DNA of most credit unions to be in that space," he said. "Most credit unions were not as impacted by the regulations following the financial crisis because most credit unions were operating their programs in a way that was not impacted by those regulations once implemented."
Scott suspects there will be "a number" of banks that take the risk of going back to the days of credit issuance prior to the crisis. "Yet, I also predict they have learned when too much credit is too much and will curtail risky lending practices before it reaches a critical level," he added.
For most credit unions, Scott said there is an opportunity to help members by taking on more risk and still continuing to manage the overall health of their portfolio.
NAFCU's Christman pointed out that consumers learn from their mistakes, and said the Great Recession was a "big learning point."
There might be "some resistance" on the part of most Americans to building debt for the foreseeable future, he predicted.
"Consumers were deleveraging credit card debt from 2008 to 2011," said Christman. "Since then credit card total balances have ticked up a little, and I do not think people are in a hurry to add a lot of debt."
Christman expects credit card debt will increase 3% to 3.5% in 2014. In 2015, he foresees the economy and the labor market should continue to improve, which will place upward pressure on wages.
"When that happens people might be more confident and put more purchases on their credit cards, but I am not sure exactly when that will happen," said Christman.
CUNA's Schenk said there is "no question" that, generally and broadly, the economy is in a better place than a year ago.
"By extension, consumers are in a better place than a year ago, and they are more willing to spend money, make big-ticket purchases and use debt to make those purchases," he said. "You could say things are going back to normal in a good way."
Interest rates remain near historic lows, and indebtedness is very low, Schenk said. The Federal Reserve publishes figures on monthly debt payments as a percentage of take-home pay. The Jan. 8 report was the second-lowest of the last 34 years at 9.9% of take-home pay. Going into the recession it was above 13%, which was an all-time high.
"People have shed a lot of debt over the last five to seven years," noted Schenk.
Another measure CUNA's economists track closely is household debt. The total debt divided by take-home pay is less than 100% — which Schenk said is about equal to one-year's take-home pay, the lowest in a decade. Going into the downturn that reading was 125% of take-home pay.
Because debt burdens are lower, incomes are increasing faster than the rate of inflation, and there is strong employment, the economy is growing and consumer confidence is up, Schenk said. "We are seeing an increase in outstanding credit card debt. Credit union credit card balances were up 8.3% in the 12-month period ending September 2014. That is double the rate of growth in 2011."
The increases have "accelerated" over the last three years, and in the most recent year was the fastest since 2007. However, Schenk said credit card balances are growing slower than total loans.
"As a consequence, credit union credit cards are equal to 6.3% of total loans outstanding. This healthy increase in balances is consistent with a recovering economy, and households that are in better shape than a long time.
"The sky is definitely not falling. We see healthy growth," Schenk said.