Beware credit card delinquencies as interest rates rise

In the lending industry, delinquency is a constant and costly threat. The best way to minimize the impact of this constant threat to credit unions’ bottom lines is to do our homework when lending; the more reliable debtors have been in past repayments and the more stable they appear to be when incurring debt, the less likely your credit union will have to write off those loaned amounts. While the industry has fared relatively well in the last several years, newly rising interest rates are cause for concern.

Beware Signs of Increased Delinquencies

According to TransUnion, creditors have reason to fear an increase in credit card delinquencies is underway. Low unemployment and a prosperous economy have made consumers quite comfortable with spending money and taking on debt, and they may be biting off more than they can chew, especially as interest rates rise.

• The 90-day delinquency rate on credit cards has increased steadily every year since 2014.
• The number of open credit card accounts and the number of consumers who use credit cards have been rising about 2% per year for the last several years.
• Average amounts owed on credit cards increased $650 per household from 2017 to 2018.
• As interest rates rise, charged purchases and payments that originally seemed manageable can become difficult for debtors to pay, especially as late fees and penalties are added.

Recognize Problem Delinquency Rates

Unfortunately, zero delinquency is often an unattainable ideal rather than a realistic goal. However, if your credit union works to identify risks before extending credit, you’ll be able to minimize delinquencies. Overall, credit unions already do a superior job of managing credit risk, as shown in credit unions’ lower delinquency rates when compared to other lending institutions.

If your credit union’s delinquency rate is less than 2.75 percent, it fits within accepted industry norms. Of course, we always wish for improvement, and specific reductions in your delinquency rate are great yearly goals for your credit union staff.

Maximize Chances of Repayment

As we said, some amount of borrower default is expected. However, there are ways for your credit union to maximize the amounts of credit repaid in full, thus maximizing your revenue and minimizing your costs:

• Remember that higher interest rates increase payment amounts and chances of delinquency. Make sure your staff is studying a debtor’s payment history, credit score, and forecasted ability to repay loans properly to protect your credit union against default.
• Salvage loans with delinquent debtors when possible. Talk to delinquent debtors right away when a loan is past due. If you address the situation proactively, you may be able to work out an alternate payment plan or arrangements that satisfy both parties.
• Be prepared to negotiate. By offering to waive a late payment fee or make other small concessions, you may help a troubled debtor get back on track and resume payments. When talking to debtors, build rapport by listening to the debtor’s explanation. Communicate the benefits of making a payment toward the debt, such as avoiding additional fees. Consider taking a partial payment, since some repayment is better than no repayment.
• Consider outsourced collections. It can cost your in-house staff five to 10 times as much to collect $1 compared to hiring a third-party collection service, due to error reduction, improved accuracy, and increased consistency. Outsourcing collections also provides your institution with newly freed staff hours that can be redirected to activities that create positive member interactions and build member relationships.

As delinquencies increase, credit unions must protect themselves against the associated loss of revenue. By properly assessing debtors’ ability to pay and addressing missed payments immediately, your credit union can minimize its delinquency rate and revenue loss. To learn more about consequences of delinquency and how to successfully manage lending risk, download our free ebook, Recipe for Risk Management.