By Ray Birch
BIRMINGHAM, Ala.—’Tis the Season for highly competitive payments competition, and credit unions are going to need attractive offers to keep their credit cards top of wallet and bring in new business, according to one expert.
Yet at the same time, that same expert is cautioning, credit unions can’t be too generous, especially when it comes to credit standards. That will only lead to delinquencies after all the boxes and wrapping have been thrown away.
“I do think this is a good time for credit, as people are in the mood to spend,” said Bill Hardekopf, senior industry analyst for MoneyCrashers.com. “We have seen all the projections saying people are going to spend money this holiday season. Credit unions can take advantage of that, but I do think they need to keep their credit standards up. It is not time to lower your standards even if there's a great desire to attract more cardholders.”
Doing so puts the credit union at risk in what Hardekopf sees as an environment ripe for rapidly rising delinquencies.
What to be ‘Keenly Aware Of’
“Expectations are for the Federal Reserve to continue to raise rates through December,” said Hardekopf. “I think what we will see soon are delinquencies, which are already rising, do so at a faster pace. And that's something that issuers are going to have to be keenly aware of because as delinquencies creep up the defaults are typically going to follow. There are several concerning factors at play right now: consumers wanting to spend for the holidays, inflation hurting household budgets, and credit card balances rising due to higher interest rates. All this portends that difficult times could be ahead for financial institutions next year.”
Other Trends to Watch
In addition to rising delinquencies, Hardekopf sees other credit trends this holiday season, citing as an example the combination of rising APRs on credit cards and consumers’ desire to do more and spend more, which can be a risky mix as the economy looks to come out of the pandemic.
Bill Hardekopf
“APRs are at all-time highs within recent memory,” said Hardekopf, who noted some retail credit cards are charging interest as high as 30%.
“And the Federal Reserve is expected to raise rates 50 additional basis points when they meet in December,” he added. “So, we’re seeing record-high interest rates and also a great amount of spending.”
What’s In Store?
This holiday season credit union leaders will need to do more than just watch for the latest Christmas deals; they must also pay attention to what competitors are doing, as offers from the major card issuers are getting even sweeter, Hardekopf said.
That includes glittery deals from many store cards, he said.
As CUToday.info reported here, store credit cards, which were once written off as outmoded, have been making a comeback.
“I just read a survey that said consumers are going to rely on store cards more this year than last year,” said Hardekopf. “Everybody is shopping, and how many times when you go to the cashier do you see the clerk trying to lure you into applying for that particular retail outlet’s store credit card by giving you 10% off the initial purchase? The retailers are trying to appeal to consumers’ desire to lower their expenses as inflation becomes even more challenging. Consumers naturally are thinking that with inflation going up, interest rates going up, so, I need to save somewhere. I do think you will see more credit union members applying for store cards in the next month and cooperatives should be aware of this.”
Tight Times in Travel
Credit unions whose cards offer travel rewards should be ready to compete, said Hardekopf.
“A lot of really nice travel rewards offers are popping up now from some of the bigger issuers,” said Hardekopf. “These deals are coming at a time when analysts are predicting this holiday season could set records for travel. People have been cooped up, they have money to spend…”
Hardekopf repeated credit union issuers should keep an eye on their delinquencies.
“Consumers this holiday season have to be very cautious of controlling their spending,” he said. “It's okay to spend as long as you can pay it back in full by the end of the month, but if they don’t we could see some trouble ahead.”