Article

How a Good Economy Can Lead to Bad Debt

stressed young woman trying to pay credit card debt
By Brad Young

3 minutes

Strict guidelines and protection products can minimize credit card delinquency for your credit union.

Sponsored by SWBC

When it comes to the U.S. economy, there’s good and bad news. The good news is that we’re at almost full employment, and consumers are feeling confident about their ability to maintain a stable income and make large purchases. The bad news? That confidence may be misplaced, since U.S. consumers’ credit card debt is at an all-time high, and delinquencies are rising.

Outstanding Credit Card Debt
Americans’ total outstanding credit card debt is higher than it’s ever been, surpassing $1 trillion last year. Here are some specifics from CNBC Personal Finance:

  • The average American holds a credit card balance of almost $6,500, a 3 percent increase from one year ago.
  • 43 percent of Americans have carried a credit card balance for two years or more.
  • The average U.S. household with credit card debt owes almost $17,000!

Increased Delinquencies
Unfortunately, according to the Federal Reserve Bank of New York, we’re seeing increases in delinquencies at all levels. Between the rising levels of debt and rising interest rates, financial institutions are finding themselves absorbing increasing losses.

According to the Federal Reserve, small financial institutions (defined as those with less than $10.5 billion in assets) experience the greatest impact from increasing credit card delinquencies. Charge-off rates have increased almost three percent in the last year, the highest rate in the last eight years.  

How to Minimize Delinquencies for Your Credit Union
When facing increased nonpayment of your institution’s credit card accounts, the best defense is a good offense. Document strict guidelines for extending credit, and stick to them. Vetting credit applicants thoroughly and taking into account existing debt when extending new credit are crucial. It has been proven that consumers are not accurate judges of their own ability to pay bills, so you must protect your credit union by saying “no” to borrowers who may be bad risks. 

With subprime borrowers failing to pay on credit card accounts at a greater rate than borrowers with high credit scores, there’s reason to believe that the industry’s willingness to loosen lending guidelines may be contributing to the current increases in delinquency. 

risk management SWBC imageHelping Members Help Themselves
Once you have your credit union’s lending criteria established and enforced, you can provide assistance to approved member borrowers through payment protection programs, which help continue loan payments during periods of involuntary unemployment or pay off a loan upon the borrower’s death. Borrowers with payment protection can rest assured they won’t leave their family struggling to repay outstanding debt in an already stressful time, and your credit union benefits from guaranteed payments. There are a number of programs available:

  • Debt cancellation products forgive a debt after a covered event.
  • Credit life insurance pays off a loan in the event of the borrower’s death.
  • Credit involuntary unemployment insurance makes a specific number of loan payments after a job loss that’s out of the borrower’s control. 
  • Credit accident and disability insurance helps repay a loan while a borrower is unable to work due to illness or injury.

Consumers’ overconfidence in their payment ability is an unfortunate byproduct of a stable economy. Fortunately, there are ways to protect your credit union from the effects of increasing credit card delinquencies. By adhering to lending guidelines and helping protect members with payment protection products, you’ll protect your members from overextending themselves and your credit union from financial loss.

SWBC LogoLearn how your credit union can optimize your risk management program with our ebook, The Recipe for Risk Management.

Brad Young is executive vice president at CUES Supplier member SWBC, San Antonio, a diversified financial services company that provides a wide range of insurance, mortgage, and investment services to financial institutions, businesses, and individuals. With offices across the country, SWBC is committed to providing quality products, outstanding service, and customized solutions in all 50 states.

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