Growing a Credit Card Portfolio is About More Than Lowering APRs and Increasing Credit Limits

The tactics for growing a credit card portfolio would seem simple: increase credit limits on good accounts to meet increased borrowing needs, adjust APRs to ward off competition for those balances, and consider rewards programs to encourage transactions. These tactics are accompanied by known hazards: higher loss exposure due to increased balances, reduced yield from lower APRs, and reduced income and increased accrued liability from rewards. But there is another concern: that you assume the risks and costs of these measures, without realizing the intended growth. Data Highlights the Issue We recently looked at the relationship between credit line increases and APR re-pricing strategies on portfolio balance growth. We looked at NCUA data for credit card portfolios over $1 million during the two-year period of June 2001 through June 2003. What we found may surprise you: there is an unexpectedly low correlation between raising credit limits or lowering APRs and a growth in account balances. We created plots to track portfolio growth, relative to changes in both APR and credit line (see charts). If these measures consistently led to growth, one would expect the data to follow a sloping line, with either bigger APR reductions or higher credit increases correlated with higher growth. Instead, the plots showed essentially no relationship; while there were plenty of credit unions that reduced APR and/or increased credit limits, there was no trend showing that those measures were associated with portfolio growth. These observations were only looking at two treatments – credit limit increases and APR re-pricing – and are using aggregate data. However, it is still striking that when looking at credit unions in aggregate, there is no demonstrable correlation between the granting of additional credit and/or the lowering of the APR with an increase in portfolio balances. It Takes More Than Product Changes Card management veterans know that the credit line and the APR are important elements when cardholders first choose a credit card and when selecting which card to use. Yet the data shows that simply making these changes alone is not enough to change behavior. This is because there are several additional considerations that must be addressed: Marketing: Was the cardholder made aware that their product now had greater utility? How was the change communicated to them? Was the communication accompanied by an offer or incentive to take advantage of the enhanced product utility? Competition: Was the change insignificant when compared to competitive offers with even better terms? Did the granting of additional credit or the lowering of price move or maintain the card into the desired position of top-of-wallet? Targeting: Were the right customers provided with the right product enhancements? In the case of a credit line increase or APR reduction, were known revolvers targeted? The data suggests that some of these critical elements were missing from the execution of many account management strategies. Unfortunately, the costs of these measures come regardless of whether growth follows, in the form of reduced net yield and increased charge off risk. Account Level Management and Strategic Marketing Account level management implies a targeted approach. An example would be a credit line increase program aimed only at cardholders that meet certain risk-criteria, revolve a balance and have a high credit line utilization rate. This defines cardholders who would receive high value from the line increase. A marketing communication piece, accompanied by a promotional rate, would create awareness and incent desired behavior. The measure of success would be increased balances per affected account as a direct result of the credit line increase program with a promotional rate offer. We often see strategies and tactics executed on a mass scale, without a competitive analysis or a marketing plan to support it. These include APR reductions or limit increases across entire portfolios, or offering rewards on all accounts. The data highlights the importance of having a well-defined and targeted strategy, with a forecasted result supported by a well-executed communication program. It is in these cases where the costs and risks, and the investment in time, energy, and resources, result in meaningful gains in account and portfolio performance.