5 Reasons For CUs To Offer — Or Avoid — Subprime Cards
March 5, 2014 11:37 AM
The subprime credit card market may be coming back, with Fenway Summer set to launch a plastic card for Americans who don't qualify for mainstream credit.
Cards analysts and credit union execs explain their reasons why CUs which typically don't play in this space should or should not offer a subprime card.
Image credit: Thinkstock
Cards analysts and credit union execs explain their reasons why CUs which typically don't play in this space should or should not offer a subprime card.
Image credit: Thinkstock
Subprime Card Is Timely
Barney Moore, senior portfolio consultant at CSCU in Tampa, Fla., sees Fenway Summer's new subprime card as a timely response to fill a void in the current lending environment.
"Millions of Americans, about one in four, have credit scores below 600. This represents a large swath of the population that face challenges obtaining credit on reasonable terms," said Moore. "Credit unions have a great opportunity to provide much-needed credit to their members that fall into this category."
"Millions of Americans, about one in four, have credit scores below 600. This represents a large swath of the population that face challenges obtaining credit on reasonable terms," said Moore. "Credit unions have a great opportunity to provide much-needed credit to their members that fall into this category."
CU Opportunity
Karan Bhalla, managing director at IQR Consulting, Santa Rosa, Calif., believes the subprime market is a big opportunity for CUs."In 2011, banks issued 1.1 million new credit cards to riskier consumers sub-660 FICO scores and this was about 41% more than the previous year's volume," said Bhalla.
"From a financial institution's perspective, these customers are most profitable. While the risk associated is high, so is the business opportunity, despite some cardholders not paying back."
"From a financial institution's perspective, these customers are most profitable. While the risk associated is high, so is the business opportunity, despite some cardholders not paying back."
No Interest In Subprime
Progressive CU in New York wants no part of any kind of subprime lending.
"I don't like subprime lending," said CEO Robert Familant. "In general it is often predatory. It takes advantage of the member."
Familant understands that members might be happy to pay 22% interest because there may be no other alternative for the loan or credit card and that access to credit is needed. "But I don't know how you help a member this way," said the CEO of the $684 million CU.
Image credit: Fotolia
"I don't like subprime lending," said CEO Robert Familant. "In general it is often predatory. It takes advantage of the member."
Familant understands that members might be happy to pay 22% interest because there may be no other alternative for the loan or credit card and that access to credit is needed. "But I don't know how you help a member this way," said the CEO of the $684 million CU.
Image credit: Fotolia
Can't Ignore Big Member Segment
Brian Scott, VP of sales at The Members Group in Des Moines, Iowa, says too many credit unions are ignoring a significant portion of their member community by not offering cards to those with lower credit bureau scores, especially those who have recently filed bankruptcy.
Scott argued that what is causing CUs to avoid subprime lending is an "imperfect" understanding of what risk and high rates actually mean, noting that credit bureau scores should be used to price a loan, not determine qualification of the loan. "Every credit union should be extending credit to those traditionally considered subprime, and they should not feel bad about charging a rate that they may consider high."
Scott argued that what is causing CUs to avoid subprime lending is an "imperfect" understanding of what risk and high rates actually mean, noting that credit bureau scores should be used to price a loan, not determine qualification of the loan. "Every credit union should be extending credit to those traditionally considered subprime, and they should not feel bad about charging a rate that they may consider high."
Card Fills Need
Eric Schurr, chief strategy officer at TMG Financial Services, Des Moines, Iowa, says a credit card targeting the subprime population can fill the need created by banks leaving the deposit advance space.
"The challenge for this group [of consumers] will be to profitably offer a low-dollar revolving line of credit with rates and fees that don't result in borrowers being caught in a cycle of high-cost borrowing over an extended period of time," said Schurr. "This type of credit card product is another in a line of symptomatic solutions that don't address the real issue: how to get out of the financial reliance on deposit advance-type loans."
Image credit: Fotolia
"The challenge for this group [of consumers] will be to profitably offer a low-dollar revolving line of credit with rates and fees that don't result in borrowers being caught in a cycle of high-cost borrowing over an extended period of time," said Schurr. "This type of credit card product is another in a line of symptomatic solutions that don't address the real issue: how to get out of the financial reliance on deposit advance-type loans."
Image credit: Fotolia
