The subprime loan crisis, tighter credit market, and decreasing property values are having a ripple effect across the economic landscape today, affecting consumers at all income levels. In many areas of the country, a fall in home values has decreased prospects for those most in need of debt relief by lessening their ability to refinance their loans and take advantage of lower interest rates.
While there is no denying that consumer spending patterns led to the financial crisis, it is also clear that there are many confusing loopholes and fee assessments that have led consumers even deeper into debt, including:
- Payday lenders with exorbitant rates and fees
- Confusing credit card practices such as universal default
- Subprime loans provided to consumers whose credit scores qualified them for better rates
- Complicated adjustable rate mortgages and hybrid rate products
- Prepayment fees for refinanced loans
In an Internet Strategy Consortium study, although 6 in 10 online members said they expect to save more, 53% said they have not even saved two months of expenses to use in case of emergency. Overall knowledge levels regarding financial topics show a need for improvement. Members have not taken the steps they need to ensure a sound financial future, and many are concerned about their debt levels.
Do You Consider Education an Expense or Investment?
Credit unions have a significant opportunity to position themselves as providing solutions and assistance to consumers during this time of economic uncertainty. In addition to providing a critical service to members in need, financial counseling and education can help strengthen the member relationship. Too many credit unions view financial education as an expense, instead of a long-term investment in building loyalty and increasing service usage in the future. Increased member savings rates can also increase shares and product usage at the credit union, having a significant impact on the credit union’s bottom line.
"I wish I had more knowledge and understanding of how to best prioritize my use of the money we do have and learn to maximize its value. I know how to get the bills paid and the basic concepts about money. But I don't always know what are the best tools for maximizing the value of my dollar without getting ripped off on financial and hidden fees. It can be very confusing in today’s world and the people who want to give you information usually do so because they want your money and they stand to make more money if they can convince you that their product is the best." – CU member.
What do members need?
Member feedback illustrates the need for basic guidance on budgeting and saving. However, many credit unions are already offering some tools in this area, so the challenge is increasing awareness and usage. More interactive tools will help better engage members on an ongoing basis, and help them stay with and meet their goals.
"I am need of a financial consultant to advise me how to get out of the debt I am currently in to start saving money to be able to purchase a home pay my bills on time with an allowance to live on paycheck to paycheck. I have no experience with doing this correctly and have destroyed my credit rating in the process. I have a good steady job and see no reason as to why this cannot be done. I would be interested in classes if this would ever be introduced. Thank you." – CU member.
Across a number of other Consortium studies, including auto lending and mortgages, we have seen member feedback regarding their uncertainty with qualifying for loans. The current market conditions make pre-approvals and online tools for members to assess their creditworthiness even more critical.
But while members agree that this is an important issue, they have not taken the right steps to increase savings. Barriers can include low credit union interest rates, a lack of knowledge regarding ways to budget and save, as well as a lack of personal discipline. Members are interested in a wide range of online tools combined with savings product features to make saving as easy for them as possible.
"I really liked the idea of the automatically deducted savings account, I have a hard time saving each month, and if the money is gone before I have a chance to get it I think it will help me control expenses better." – CU member.
Credit unions should view the development of interactive and personalized savings tools as another opportunity for strengthening the member relationship. Ongoing messages via email alerts related to savings goals can help members become more aware of credit union products and services, and increase reliance on the credit union with their primary transaction account
How Are Credit Unions Responding?
Eli Lilly Federal Credit Union ($828M, IN)
Eli Lilly's educational program includes a range of resources, including newsletter articles, seminars, online articles and a new offering, podcasts and financial tips discussed on their blog (www.elfcu.org). Their focus includes employees as well through credit union-wide "Lunch and Learn" seminars in an effort to increase understanding regarding credit. According to Terry Mossbrucker, Assistant Vice President, Asset Recovery, "We find that members don't understand how and why they should change their FICO score. There are many misconceptions, such as thinking that paying utilities on time can enhance their score."
Eli Lilly also offers personal debt counseling sessions to review member's finances line by line. While they haven’t yet seen an increase in the number of sessions, they are seeing an increase in the severity of problems. Mossbrucker says more members are living on the edge and the "fixes" are not as easy. In some cases, they call in financial planners to help members restructure both their debt and invest in the future.
Capital Credit Union ($191M, ND)
For Capital Credit Union, financial education is considered critical for both employees and members. Lori Bienek, VP, Marketing and Administration at Capital Credit Union sees a key opportunity for credit unions, "Credit unions need to say, you can trust us, we won't put you in the wrong type of mortgage loan. By educating people, they will learn to trust you." She also suggests that credit unions reconsider their own marketing efforts in terms of educating members to use credit wisely. "We're re-thinking our advertising, such as not suggesting that members use their home equity loans to go on vacation," she explains.
Capital's multi-faceted program includes requiring employees to have 75 hours of education per year. The goal is to ensure their staff can not only enhance their own financial position, but be better able to explain services to members. They hold monthly educational sessions, in the morning before the credit union opens. Employees can also attend evening seminars held for members.