ST. PETERSBURG, Fla. - Problems in the first mortgage market mean credit unions should keep a closer eye on their card portfolios, according to several analysts.
At issue is a big question over how those problems will pay out: will outstanding card balances increase along with transaction activity, which could largely be seen as positive, or will delinquencies spike, a clear negative.
Both outcomes are entirely possible, according to several card experts.
"We're not seeing much [activity related to the housing market] in card portfolios yet, but certainly there will some effects felt," said Kenton Potterton, director of credit services and new product development at credit card CUSO PSCU Financial Services. "There is a hypothesis out there that as home values continue to back off and consumers look to see where they can still access credit they may end up protecting the credit card, because that's where their future credit could come from because the equity in the house is already tapped out."
That would seem to run counter to conventional wisdom that if a borrower can't pay all his bills and has to choose between paying the mortgage or the card balance, he will pay the mortgage first.
"It really is all being turned on its head," agreed Scott Wagner, EVP of TNB Card Services, Dallas. "It's hard to imagine anyone letting the house payment go in favor of the credit card, but we have heard that theory, too. We haven't seen any indications in any of the credit union card portfolios we manage, yet, but we're on the lookout for it."
That means there's still time to get in front of the trend and work on preventing problems, suggested Cassie Ricks, communications manager for card processing CUSO CSCU, Clearwater, Fla.
"As of yet, we've seen no evidence that delinquency is on the rise in card portfolios, but if the housing market continues to deteriorate, then we do expect to see an increase in card usage and possibly in delinquencies, as well," Ricks related. "We have partnered with Visa to provide free financial literacy materials to our credit unions that they can co-brand and offer to their members."
And credit unions are hungry for information on the topic, with 278 of CSCU's member credit unions attending a recent webcast on these programs, she reported. One of the programs is "What's My Score" and is targeted at young adults who just graduated from high school or college. The other, "Practical Money Skills," can be tailored for middle school students all the way up through adulthood.
"Educating members on financial issues is key," Ricks offered. "Arm them with information, and they will know how to keep themselves out of trouble."
And what of credit union members who are already in trouble?
"Some red flags to look for would include delinquency, of course, but also look at the balance to open credit limit," she suggested. "Forty percent is that golden line that you don't want your members to cross. If you see that line crossed you may want to reach out to the member to see what's going on."
Constant monitoring of the portfolio and underwriting standards is equally vital, and is something credit unions should be doing all the time, regardless of other economic factors.
"There are some very good tools on the market, but credit unions have been slow to adopt those tools," Potterton noted. "Let's manage the portfolio you have today and track how people's credit quality changes over time."
Tools for monitoring the portfolio aren't the only thing credit unions have been slow to adopt. Though some CUs have been using risk-based pricing on a good number of their loan products, most of those credit unions have delayed adopting risk-based pricing and scoring of their credit cards, Potterton said.
"We've said for a long time that we'd like to see that change and have more credit unions use risk-based pricing on their cards just as they on other loan products," he said. "As the market shifts and credit scores are used more, we hope they will reevaluate this and take advantage of these tools."
The reason credit unions haven't felt a sense of urgency to apply risk-based standards to credit cards: they may up a relatively small portion of assets, so CUs just don't focus on it, he said adding, "now they're taking a harder look."
Keeping a close watch on the portfolio doesn't necessarily mean tightening standards or pulling back on offering credit. "We've seen credit unions that have really stepped up their acquisition campaigns" because of the way the tide has turned on housing prices, Potterton observed. "We're running promotions aimed at members who are not yet cardholders, screening them and then making the offer. We're trying to increase penetration rates, and we're seeing an increase in credit unions participating in these campaigns. We had maybe 30 sign on last year, but we've had about four times that amount this year."
