The much-discussed uncertainty around student loans is having a spillover effect on other debts, such as auto loans. But the most vulnerable area is going to be credit cards, where delinquencies for 20-somethings have been on the rise. And this scenario is likely going to get worse before it gets better.
As risky as younger people are for credit card issuers, they are also a potentially lucrative target to become lifelong customers, a group card issuers cannot ignore. In a new report, Young Borrowers: Riskier Than Ever… and the Future of Credit, Brian Riley, Director of Credit at Javelin Strategy & Research, looks at the challenges faced by issuers focused on this segment and the innovative ways some issuers are building relationships with them.
Losing Access to Credit
Student loans are just one of the pressures negatively affecting younger credit card users. Another effect is a result of the Card Act of 2009, which ended the practice of giving college students access to credit cards. The law established an ability-to-repay test on credit card lending, requiring the student to show that they would qualify for a loan, such as by meeting a certain income threshold.
“That reduced college marketing by something like 90%,” Riley said. “Even though students were mostly using them to buy pizza and beer, it gave them a foundation that you have to pay your bills on time and built up their credit history. “
Around the same time that law took effect, the student loan bubble popped up. As students stopped getting credit on their way up the ladder, they were also incurring a great deal of liability because of their student loans. These students had no established credit but did, in many cases, have substantial student loan debt.
When members of this generation entered the job market, they were also faced with the question of what to do with all that student debt. It has been suspended and reinstated and canceled to the point that many borrowers are unaware of where they stand. On top of that came inflation.
Behind the Eight Ball
The latest metrics indicate that nearly 1 in 10 cardholders in the youngest segment have reached 90-plus days of delinquency on their credit card balances. Entering 90-day delinquency is a significant trigger in credit, indicating a need to take action on the account before it gets charged off as bad debt at 180 days of delinquency.
“That is a real costly thing that credit card issuers have to deal with,” Riley said. “It comes right off their income statement. That’s where the risk is.”
But card issuers also can’t maintain a business by relying on 70-year-olds. They need to build their portfolios on younger people, which means they have to accept some of the inherent risk.
Once these younger borrowers reach their 30s, they generally start accumulating assets, whether that’s a 401(k) or a house. An issuer cannot afford to shut down outreach to this cohort because delinquencies are running high. Even if these borrowers need to be coddled at the outset, this is where card issuers begin to build cradle-to-grave relationships.
“You have to train them better, let them understand how long paying off these cards can take,” Riley said. “If you just pay the minimum due, you’ll be 50 before it gets paid off.”
The Promise of Starter Cards
One method by which issuers can gain access to young people without good credit is through starter cards, which require a deposit the borrower can then draw on through the use of the card. Before the Card Act of 2009, such cards were largely unregulated.
“There were all kinds of stories about start-up banks in South Dakota that required a $500 fee down to get the card,” Riley said. “They’ll secure it with $200 and then take $200 in fees. When the customer got the card, there was probably $100 left to use on it.”
But these cards have become much more user-friendly in recent years. Capital One, for instance, will gradually increase the credit limit above the customer’s deposit. An account that started with a $500 limit might increase to $1,000, even without the cardholder needing to add deposit money. Discover will qualify a buyer for a true credit card and refund their deposit money once they have become established.
KeyBank actually has a celebration for people when they progress from a secured card to an unsecured one, marking it as a milestone for the issuer as well as the cardholder. “You don’t want to always have the customer on the starter card,” Riley said. “You want to give them something and then start building their relationship.”
Age Unknown
Another complicating factor is that the law prevents credit card companies from knowing how old their borrowers are. But they may be able to identify applicants who are new to credit.
“When they get declined for a regular card, one option that works well is to push them down the stream that says we won’t give you a regular card, but here’s a secured card,” Riley said. “Capital One might go to Equifax and say, ‘Give me five million names of people who might have a thin FICO score or employment of less than X years.’ You can’t go in and say, ‘Give me people that are 18 to 21,’ because the Fair Lending Act says you can’t discriminate on age.”
The Opportunity in Credit Unions
One avenue that Riley recommends for young people is credit unions. The average credit union member is 53.9 years old, despite the fact that many aspects of credit unions are especially advantageous for young borrowers.
“It’s really a good place to go for a credit card because there’s a cap in there,” Riley said. “By law, they can’t charge more than 18%. They really need to foster that whole generation, shepherd them into the portfolio, and then start cross-selling.
“Once they’re there, you can’t just deal with credit cards. You have to think of the whole lifecycle and how you’re going to handle this person from cradle to grave.”
The post The Young and the Restless: Marketing Credit Cards to 20-Somethings appeared first on PaymentsJournal.
