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Turning credit scores into an opportunity

How do you turn a credit score in the 600s into an opportunity? At the other end, how do you attract—and retain—someone in the 720s and higher?
With LendEDU’s new report out ranking states by credit score, Credit Union Journal talked with credit unions in some of the highest and lowest ranking states to find out what the unique challenges and opportunities are—and the strategies they use to make the most of them.

According to the LendEDU study, which gathered aggregate data licensed from Experian, Minnesota boasted the highest average credit score at 722, followed by North Dakota and Vermont (713 each), New Hampshire (712) and South Dakota (711).

At the other end of the spectrum, Mississippi had the lowest average credit score at 648. Four of the bottom five states were all in Dixie, including Louisiana (654), Georgia (656) and Alabama (657). Nevada also came in with a 657 score.

Overall, the national average credit score was 682, with 29 states exhibiting scores above that average.

Among the heaviest populated states, credit scores ranged from 694 for New York, 689 for Illinois, 688 for California and 660 for Texas.

What drives a state's ranking?

Mike Brown, a research analyst at LendEDU, a personal finance comparison marketplace based in Hoboken, N.J., commented that the average credit score of a state is a “very sound reflection” of the strength of a local economy, which is nonetheless a “very hard thing” to put a numeric value on.

“Areas that have high average credit scores have usually experienced rising incomes, falling unemployment, and a decreasing number of defaults on loans and mortgages,” he elaborated.

Brown further noted that while the best- performing states do indeed have small populations, that does not necessarily make it easier for them to post such high credit scores. Indeed, he cited that certain other states with relatively small populations -- Oklahoma, New Mexico, Alaska and Nevada, for example -- all posted average credit scores near the bottom of the list.

As for the low credit scores found in the Southwestern states, Brown observes that the fallout from the housing crisis was certainly a contributing factor. “However, while these states may be seen as on an 'economic upswing,' it could be years until the benefits hit their residents directly,” he added. “For this reason, average credit scores in these states may not see an increase for a bit of time.”
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Beautiful lighthouse by the ocean at sunset

Two New England states score well

Two far northern states and neighbors, Vermont and New Hampshire, also scored very well on their credit profiles.

Yvonne Garand, senior vice president marketing & business development officer at Vermont State Employees Credit Union, a $729 million institution based in Montpelier, Vt., attributed these high scores to the “New England mindset” which may “create a higher level of conscientiousness in credit behavior.”

With unemployment at 2.9% in September, Vermont is also one of the “grayer” states with a decidedly older—and more established—population.

“The younger demographic continues to shrink in Vermont which means a lower number of Millennials carrying debt in our state,” she said. “Vermont has 25,000 fewer residents aged 20 and under than 17 years ago. Lastly, the small population of 620,000 may create a more favorable credit score average in Vermont.”

In order to take advantage of this situation, Garand suggests that local credit unions highlight benefits of doing business with a locally owned financial institution and reward good credit with better rates. The average credit score at VSECU is a whopping 720.

“At VSECU we are committed to helping members achieve financial literacy and capability as a means to sustainable living,” she stated. “We believe that our access to educational information and consultative services has helped members achieve this financial well-being, which in turn, creates a meaningful relationship between our members and VSECU.

Separately, Garand pointed out that Vermont does not have any “big banks” in the state such as Wells Fargo or Bank of America. “This doesn’t mean that Vermonters are not utilizing these lenders to support their borrowing needs, but the physical absence of such institutions, may be a blessing for Vermonters,” she concluded.
Minnesota welcomes you sign at the state border

High scores, high competition

The land of 10,000 lakes ranked at the very top of LendEDU’s list, helped in part by the state’s unemployment rate, which plunged from 8.1 percent in June 2009 (during the depths of the recession) to 3.7 percent in September 2017.

Dean Warzala, vice president of mortgage lending at Hiway Federal Credit Union, a $1.1 billion institution based in St. Paul, said Minnesota consistently ranks well on credit scores due to the overall economic strength in the region, a great payment history resulting in low delinquency/foreclosure rates, low percentage of credit utilization, high financial literacy, personal money management as a focus for teens, numerous high school branches for credit unions, and strong saving habits, among others.

Hiway is definitely seeing high credit scores among its membership, Warzala added, so the credit union offers “more competitive rates, lower closing costs, faster approval turn times and an enhanced member experience.”

In such a competitive market, credit unions would be wise to promote awareness of themselves as full-service institutions and position themselves as a trusted advisor, Warzala suggested, adding that Minnesota CUs can leverage this by “emphasizing their cooperative nature, member advocacy and giving back to the communities they serve.”
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Bullet holes riddle the welcome sign for North Dakota

The power to shop around

North and South Dakota (which together comprise 1.6 million residents, or about the same as Phoenix), also ranked high in average credit scores.

Both Jeff Meyer, president and CEO of Dakota West Credit Union, a $250 million institution based in Watford City, N.D., and Steve Schmitz, president and CEO of the $565 million First Community Credit Union of Jamestown, N.D., suggested the financially conservative nature of the state’s residents accounts for the high credit scores.

"In general, it seems that people here don’t stretch themselves as thin on payments as they might in other areas of the county," said Schmitz. "Also, I think there is a stronger commitment to repay; with our rural population, you likely know your credit union loan officer personally, making it less likely that someone quits paying when times get tough.”

And some of that conservativism may arise from the boom-and-bust industries in the state—agriculture and energy—according to Melanie Stillwell, president and CEO of the $322 million Western Cooperative Credit Union in Williston, N.D. “And they tend to teach that to their children," she said. “North Dakotans do tend to be more conservative than many other states.”

One potential issue the region faces is that with it’s extremely low unemployment rate (1.9 percent in September 2017), the state is attracting jobseekers from other states with poorer credit histories. “The credit scores we see here at Dakota West are considerably below the state's average," Meyer said. "One reason for that may be a good percentage of the loan requests we receive come from members who only recently moved to North Dakota in the last couple of years. In most of these cases they arrived here for employment opportunities that didn’t exist where they came from, consequently they had difficulties meeting their financial obligations prior to arriving here resulting in the lower credit scores.”

The challenge, then, isn’t so much competition from other lenders, Meyer offered, but rather from "deciphering the true character" of the borrower. "Did the low credit [score] actually result from previous difficulties with employment or do they not place the proper emphasis on meeting their financial obligations in a timely manner?”

Still, CUs do face some stiff competition, particularly from online lenders, Schmitz noted. "Most of these online models are primarily driven by a person’s credit score and make North Dakota borrowers a good credit risk,” he said.

Stephanie Honeyman, VP of consumer lending at the $448 million Capital Credit Union, Bismarck, N.D., said her company has enjoyed the advantage of lending to a "lower-risk member base, resulting in lower-than-average portfolio delinquency percentages versus other parts of the nation.”

Honeyman estimated that 80 percent of Capital CU members have a 680 or higher credit score. "We do offer lower rates and faster loan decisioning to these high credit score members,” she said. “This probably doesn’t make it hard for us to lend, but certainly, we have to keep a close watch on what interest rates are being offered in the markets we serve to compete for the business.”

Moreover, as Barb Daniels, consumer and mortgage loan manager at Western Cooperative CU, observed, with so many “A” borrowers in the fold, there’s a lot of interest rate shopping being done.
welcome to louisiana sign at the highway

Scores at or below sea level?

Louisiana, a state with high rates of poverty, had among the lowest average credit scores in the nation – similar to several of its neighbors in the Deep South.

Lynette Hazelton, marketing director at Heart of Louisiana Credit Union, a $105 million institution based in Pineville, said her CU helps members daily with credit scores that align with Louisiana’s average credit score.

“As with any extension of credit, the credit union is accepting the risk of non-payment,” she said. “While it may be easy to view credit scores in the mid-600’s as a challenge, we choose to see the opportunity that is presented to us.”

When reviewing any application for a loan, she explained, the primary goal is to “help our members make the best financial decision they can.”

For many members in this low score category, she added, they’ve been denied several times without being told why or how to improve their situation.

“There are times we can help with their loan request, but there are also times [when] we cannot,” she admitted. “Even if we can’t help today, we always try to help them [by providing financial] education on how to improve their score. Many times they heed the advice and come back in six months or a year. It’s always very rewarding (for the credit union and for the member) when we can extend credit after they’ve worked on improving their score.”

Hazelton believes better financial education could play a major role in raising credit scores in Louisiana.

“Our most successful efforts take place during our annual Financial Check-Ups, which we typically run for six weeks,” she stated. “We encourage members and non-members to visit with us to learn and ask questions to specifically better their financial situations – including their credit scores.”

Most recently, Heart of Louisiana began training staff as Certified Credit Union Counselors. “This will empower our team to help assist members in reaching their financial goals,” Hazleton added.
sweet home alabama welcome sign at rest area stop off highway

Where ratings head south

Alabama, the very heart of Dixie, also scored poorly.

Fred Trusty, executive vice president and chief marketing officer at Redstone Federal Credit Union, a $4.8 billion institution based in Huntsville, said that the South as a whole has underperformed the rest of the nation for decades.

“A consumer’s payment history weighs heavily on the credit score and there tends to be higher numbers of 30 to 60-day delinquencies in the state,” he said.

While it’s difficult to pinpoint one factor, Trusty proposes a major factor might be the high use of payday lending in the state. Indeed, Alabama has the highest number of payday lenders, per capita, of any state in the U.S. “These loans carry interest rates of over 400 percent,” he cited. “This cycle of debt is a reality for one in four Alabamians today.”

Trusty noted that Redstone FCU is combatting this problem on several fronts: providing financial education, offering free credit scores, helping members break the payday lending cycle, and working with Alabama lawmakers to curtail payday lenders.

“Redstone provides hundreds of hours of financial literacy and financial education seminars and workshops to the community through partnerships with schools, colleges, non-profits, and businesses,” he elaborated. “For its members, there is one-on-one counseling and a complete online financial fitness program they can take advantage of.”

In addition, Redstone FCU Members who have a loan product can get their FICO score for free inside online banking. They can also monitor their credit score and see the top reasons for their score. “Once they know what the problems are, they can work on fixing them,” Trusty added.

Finally, Redstone offers a payday alternative loan and stretch loan to help members build or rebuild their credit and to help them make it to their next paycheck. “These small-dollar, short-term loans have lower interest rates and fewer fees than a typical payday loan store,” he specified.

Redstone’s President and CEO Joseph Newberry called predatory lending a “blight” on Alabama and continue to work to curtail it. Earlier this year, Newberry served on a state-wide task force and helped to identify legislation that would provide more oversight of the payday lending industry and lower the interest rates they charge customers.

Trusty also said that Redstone FCU’s loan applicants have an average credit score of 673, or 16 points higher than the state’s average. “That gives us more flexibility to lend in areas with the lower scores or the scores that are more in line with the rest of the state, for example, our Stretch or Payday Alternative Loans,” he said. “In addition, we offer Community Partnership loans through a third-party for members with lower credit scores. We also offer real estate loans to first time homebuyers that allow for credit scores well below the state average."