As Credit Card Penetration Grows, So Does the Risk

Once a niche product in a credit union movement far away and long ago, credit cards continue to grow in presence across the industry. But some of that growth bears particular watching right now.

That’s because while credit card penetration among members and the number of credit unions themselves offering cards has shown steady growth, delinquencies and charge-offs appear to be on the rise as well.

Credit unions’ exposure to credit risk posed by credit cards is, of course, limited by the size of the portfolio. For instance, while credit cards represented 28% of the industry’s total charge-offs in the first quarter of 2018, they were only 5.8% of the total loan portfolio ($10.13 billion out of $983.3 billion).

Of course, flip that point and you can say that while credit cards represent only 5.8% of the credit union industry’s total portfolio, they’re responsible for 28% of total charge-offs, up sharply from 22.5% five years ago.

The higher charge-off rates reflect credit unions’ management of those unsecured lines of credit. It’s interesting to note, for instance, that according to Callahan & Associates’ analysis of first quarter data, credit card net charge-offs were at 2.87% and delinquencies were at 1.24% among the nation’s 5,646 credit unions.

In the past two years the credit card charge-off rate has spiked 63 basis points, a 28% rise from the 2.24% it was in the fourth quarter of 2016. Five years ago, those rates were 2.13% and 0.87%, respectively.

Flip that for mortgages. The delinquency rate for first mortgages in the first quarter was 0.43% and for net charge-offs, 0.20%. Five years ago, those numbers were 1.28% and 0.24%, respectively.

For autos, the space between charge-offs and delinquencies has been narrower the past five years: 0.53% then to 0.55% now for total auto delinquencies, and 0.43% to 0.65% for total auto charge-offs.

The industry as a whole appears to be quicker to pull the trigger on writing off that unsecured debt, while at the same time strategically handling the much-larger, secured obligations in a way that yields fewer write-offs than delinquencies.

As of the first quarter, the average mortgage at a U.S. credit union was $142,674, the average auto loan balance was $14,647, and the average credit card balance was $2,895. That’s up from $2,680 five years ago and it could go much higher. Which brings us to utilization.

The utilization rate – how much of a credit line a member is using times the whole industry – was at 31.1% at the end of March. That’s actually down from 32.2% at the same point five years ago, something that may well reflect larger credit lines as much as restrained spending. That also means that the nearly 20 million credit union members with credit cards have another 68.9% of that aggregate credit line out there to spend.

That’s an issue for the C-suite and audit team to grapple with as they prepare for accounting changes coming with the new CECL standards, but for the purpose of this discussion, let’s look at how that relates to penetration. That unused credit line is actually fairly concentrated, not evenly spread across the whole credit union movement, which spans 114 million members nationwide.

Why? Because only 61.2% of America’s credit unions offered credit cards as of March 31, 2018. That’s up 10.1 percentage points from 10 years ago, though. The shrinking number of credit unions, especially among those that don’t offer critical products such as plastic, is at play here, along with increased use of cards by members at the member-owned cooperatives that remain.

There we see penetration rising. In the past five years, the percentage of members with credit cards from their credit unions has risen two percentage points to 17.3%. It’s also interesting to look at regional differences. The highest penetration rate is in the NCUA’s Mid-Atlantic Region at 23.26% while the lowest is in the Southeast Region at 14.27%.

So the big takeaway here seems to be that while credit cards remain a profitable, growing product in the credit union industry portfolio, it’s time to be particularly vigilant about charge-offs and delinquencies and what that could mean among the individual credit union’s membership as the economy approaches the inevitable next downturn.

Liz Furman is Senior Manager of Industry Analytics for Callahan & Associates. She can be reached at 202-223-3920 or efurman@callahan.com.