Use Credit Line Management to Drive Profits and Reduce Risks

Implementing and managing credit card portfolio has always been an important activity for credit unions. This has been so because credit cards have always been the most profitable product for any financial institution. It is such a fluid and versatile product that this imparts financial institutions the flexibility to offer a wide range of rewards, features, and pricing on them. Credit unions, who are generally limited in terms of product portfolio, can use credit cards to expand their offerings and attract a variety of members seeking different benefits.  

An important step in managing a credit card portfolio is continuously assessing and maintaining appropriate card limits for each individual cardholder.   By doing this, you will continue to reward loyal transactional behavior and incentivize additional spending opportunities for those in your portfolio who are eligible for higher credit limits and manage risks for members with higher chances of turning delinquent in the future. 

Managing Credit Limits needs to be a Continuous Activity 

With advancement in technology and analytics, the process of setting and reviewing individual cardholder limits during underwriting has become quick and easy.  It is generally driven by several external and internal factors like the local or overall economy, competition among the FIs, cardholder’s income, employment status, other debts, and payments schedule.

Past the initial set up of one’s credit card, constant assessment must be done to ensure you are providing proper limits. By analyzing and acting on your discoveries, you have created a card that is as flexible as each of your cardholders. With limits being constantly considered, you have a higher chance of remaining top of wallet, mitigate your risk and will continue to be competitive with other offers that your member will be receiving. 

Credit Limits Influence Cardholder Behavior 

It is no secret that most cardholders have more than 1 credit card to choose from. To achieve top of wallet status, a card must provide the cardholder with a credit limit that is appropriate and competitive.  When it comes time to complete a purchase, the decision on which card to choose could hinge on several factors, one of which of course is the credit limit. 

Imagine a cardholder with an A+ credit rating who has two cards – one from an issuer with a limit of $7,500 and the other with a limit of $15,000 from another issuer.  With all other things equal, the card with the higher limit is the one that the member is most likely to reach for when making purchases. This is especially true for cardholders who use cards more frequently or for transactions with higher amounts. Therefore, it is utmost important to establish and maintain competitive credit limits, so that your credit union’s card is at the top of wallet. 

Drive “Top of Wallet” Card Behavior with Credit Limit Increases 

Offering lucrative rewards on card usage have been an important driver and areas of focus for FIs to become top of wallet. Despite of innovating and continuously researching on the ‘right rewards’ to offer, FIs are struggling to get desirable results. Interestingly, 2 among 5 cardholders have switched their primary card in  a period of two yearsso loyalists are hard to come by.  

Do not shy away from awarding limits that are on the higher end of your maximum credit limits. If you are pushing messaging that states to use your credit union’s credit card, then you want to reward that loyalty with a proper limit. Now is not the time to be conservative, if the member is deserving, someone will offer them a high credit limit.  

 A 360-degree approach is required to attain ‘top of the wallet’ card status and offering limit increases need to be a key component to it.

  • Our analysis also shows that inactive members cost $1 per card per month to FIs with no revenue at all.  But offering a credit limit increase can bring back some of these inactive members to life and provide an opportunity to re-engage. Independent studies have shown that improving the retention by 5% increases the profitability by 25%-95%.

  • Credit Limit Management is the ‘way to go’ to boost member spending & balance behavior. Our client, an IOWA based credit union with $6.5 B in asset size decided to go aggressive on credit limit increases. This step was data-driven based on detailed segmentation of their members based on existing credit limits and their risk scores. The credit union recorded an impressive incremental credit card purchases of $1.74 MM & balances of $1.45 MM in a period of 10 months. The spend per card was up by 7.7% and balances by 14.9%.


Keep ‘Risks in Check’ with Credit Limit Decreases 

It is good to indulge cardholders with rewards & promotional offers but not at a cost of heavy losses.  Identifying the hidden risk underlying in the credit card portfolio & and taking measures to control it is the need of the hour. Credit limit decreases can play a pivotal role for credit unions to keep a tab on the risks. By lowering the limits for the future delinquent members, the loss would be less significant. Eventually it would reduce the efforts of the collections team as well.

In the wake of pandemic, many credit unions & banks have come out to support cardholders and extended a variety of measures to ease off their credit card debt burden. In lieu of the support, you might decide not to undertake any credit limit decreases. However, you should definitely be proactive in carrying a detailed assessment of the current cardholders to identify which members are likely to go delinquent on the near future.

We helped a California based credit union with an asset size of $1.25B to analyze their credit card portfolio to identify members with high risk. With a data-driven approach, the credit union was able to reduce their risk exposure by 90% amounting to $1,692,710. Average payment increased by $27 per card per month with a total savings of around $10K in 5 months by just targeting 2% of the portfolio. 

A Recap on Credit Limit Management Techniques 

 

Pros

Cons 

 

Credit Limit Increase 

 

  • Boost card spend and balances 
  • Increase cross-sell success 
  • Reduce member attrition 
  • Help re-engage inactive members 
  • Drive member loyalty & satisfaction 

 

 

Incremental risk exposure 

 

Credit Limit  Decrease 

 

  • Decrease delinquencies and charge offs 
  • Reduce collection team efforts 
  • Undertake proactive risk management 

 

 

Reputation risk

Due to competitive forces and cardholder behavior, it’s critical to provide cardholders with credit limits that are appropriate and competitive at all times.  Card issuers who have a strategy of “set it and forget it” simply cannot achieve and maintain top of wallet status.  Combining the power of business intelligence with analytics based on data that is readily available, the process of credit line management can be easily automated which will lead to increased usage, spend, balances, interchange income and profitability. 

Learn about data driven solutions to drive credit card portfolio growth by watching our recent webinar recording – view on-demand.

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