Optimize Your Card Portfolio: Four Steps

Evaluate risk, cut costs, and retool traditional promotions.

October 4, 2012

As credit unions seek to build solid, sustainable credit card programs, they should focus on four areas: Risk tolerance, card activation and use, inactive accounts management, and promotional programs.

That’s what Brian Scott, vice president of sales at The Members Group (TMG), writes in the TMG white paper, “Credit Card Portfolio Best Practices for the Modern Payments World.”

He advises credit unions to take four steps to optimize their credit card portfolios.

1. Recalculate your risk tolerance

Avoiding all risk is inherently risky. If less than half of your cardholders don’t regularly incur finance charges, your credit union might be might not be extending credit far enough.

Scott advises card managers to look beyond A-paper applicants and examine their approval policies to make sure they’re not automatically excluding consumers with less-than-perfect credit histories.

“By making actual conversation with an applicant into a distinct and important procedure in the application process, issuers can more easily justify nontraditional approvals,” Scott says.

If changing your approval process isn’t in the cards, consider increasing credit limits, at least for cardholders likely to take advantage of this. Cardholders generally stop using their cards once their balances reach 30% to 40% of their limits, TMG reports.

“If a member’s credit union card only allows them to spend up to $2,000, that new TV more than likely is going to be purchased with a competitor’s plastic,” Scott says.

2. Strike while the iron is hot

To achieve a truly active portfolio, issuers must act immediately upon the approval of a new credit card account.

“It can be shocking to first-time credit card issuers to realize how many approved cardholders never even activate their cards,” Scott says. “While these issuers are clearly missing an important element to successful program management, they deserve kudos for tracking the activity in their portfolios. Without proactively monitoring things like card activation and use, credit unions may never unlock the growth opportunities their portfolios present.”

Features such as instant issuance and customization (which allows cardholders to select and change the photos that appear on their cards) can greatly increase card use.

TMG clients that provide plastic to approved applicants immediately see a nearly 50% increase in transactions during the first 45 days of the account, Scott reports.

3. Trim the fat

Inactive accounts (those that have been dormant for six month) cost money. If you’re not tracking dramatic changes in account activity and responding accordingly, start now.

Often, card issuers place too much emphasis on achieving card penetration goals, which can prevent them from closing inactive accounts. That’s a costly mistake.

“Without the interchange or fee income to offset account management expenses like cardholder support and fraud prevention, these accounts can silently drain the profitability from even the most robust portfolios,” Scott says. “Every six months, issuers should close inactive accounts to maintain a clean, healthy credit card program.”

Identifying which cardholders have suddenly stopped transacting can allow credit unions to reverse this trend by, for example, offering incentives such as double rewards or a free upgrade to a customizable card to encourage card use.

4. Retool traditional promotions

Many tried-and-true methods for attracting new cardholders and increasing card use can create larger problems down the road.

Balance transfer promotions, for example, are effective at attracting new cardholders—but many of these consumers are what Scott calls “balance hoppers,” who move from one card issuer to the next.

More effective methods include:

“The most successful promotions are those based on defined user groups,” Scott says. “It’s becoming increasingly important for card issuers to segregate their portfolios, identifying which accounts are transactors, revolvers, pay-downs, and inactives. This allows card managers to better target their campaigns and to have a better shot at building long-term loyalty.”