Evolving Economics Trends Challenge Credit Score Considerations

Put the right products and services in place, and then take a closer look at credit-damaged members.

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finanical-repairLingering impacts of the Great Recession are fading; however, personal struggles still abound in many regions. Despite the rough economic environment of the past few years, the average national FICO score this past spring still hovered around 690, roughly on par with 2007 pre-recession levels, according to the Wall Street Journal. Credit unions know the picture painted by FICO trends and the economic realities of members might not perfectly align. That’s why many credit unions are rethinking their credit decisioning and offering new products and solutions aimed at wider spectrums of the financial landscape.

Good Times In Northern Climes

When it comes to national averages — with a few exceptions like Santa Barbara, CA, and Honolulu, HI, — southern and western states struggle with lower credit scores than their central and northeastern peers.

Fast Fact

In 2012, Minneapolis posted the highest average credit score, 787, while Harlingen, TX, posted the lowest, 688, according to Experian.

Some institutions consider C and D grade borrowers too risky, but credit unions in regions with chronically low credit scores have had to become adept at assessing the difference between personal faults that result in poor credit scores and economy-related issues that shape scores across the entire region.

Payday and subprime loan products tend to layer on hefty rates and fees and trap borrowers in a cyclical pattern of destructive behavior. To respond to the needs of such borrowers, credit unions are creating long-term, affordable alternatives that include financial literacy components or offer tangible incentives such as credit bureau reporting or rate reductions. Far from making money off the credit damaged, these products are designed to help borrowers reach a point where they’ll never need such services again.

Unwrecking Your Checking 

In California’s Inland Empire, where unemployment remains 12.8% and many formerly banked individuals now struggle to pass the ChexSytems litmus test, Altura Credit Union ($674.8M, Riverside, CA) has launched its Reliance Checking account.

“Many local residents have been left with credit problems and a negative credit history,” says Jennifer Binkley, Altura’s chief operating officer. “Traditional banks turn them away, not only for loans but also when applying to open a checking or savings account. Can you imagine having no access to ATMs, no resources for paying bills, no relationship with a financial institution?”

Reliance Checking offers a debit card, online and mobile banking, eStatements, and a host of educational resources. It initially comes with a $10 monthly fee and a direct deposit requirement, and account holders cannot make deposits though the ATM. However, Reliance Checking members are eligible to transfer to any of Altura’s other checking products, including an account that is free with five debit card transactions per month, after six months of responsible behavior.

Assisting Young Borrowers

During the height of the recession it was difficult for institutions to separate irresponsible borrowers from good borrowers in bad circumstances. That issue is now compounded by the question of where those with no credit history should fall along the spectrum.

Fast fact

Gen Y has the lowest amount of debt of any borrower demographic. It also has the lowest average credit score, 672, according to Experian. By contrast, Gen X has the highest amount of debt of any demographic and the second-lowest average credit score, 718.

Products such as Darden Employees Federal Credit Union’s ($28.8M, Orlando, FL) Credit Builder Car Loan offer the same opportunities for unproven new borrowers as for those with strong financial histories who were dinged by temporary setbacks.

“This product was developed specifically to help our members who either have no credit history, because they're young and this might be the first time that they're looking to get any form of credit, or they have had some rough patches in the past and need to rebuild their credit,” says Brooke Rodriguez, the credit union’s assistant vice president and marketing manager.

Regardless of credit score, if borrowers can satisfy alternative lending criteria — including one year of continuous employment and six months of membership or the ability to deposit one month’s payment upfront — the credit union will approve them for an auto loan of up to $12,000. The product’s interest rate starts at 17.95% but drops 1% with every six months of on-time payments.

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“When we launched this product, we first reached out to our vehicle applicants that had been declined in the recent past,” Rodriguez says. “We talked about this product and explained how it might be a good fit for their needs.”

Taking An Advisor Mindset

Many credit unions integrate mandatory financial literacy components into products and services designed for the credit damaged. However, it’s not only members with poor credit scores that can befit from such resources.

“In challenging financial times, it is more important than ever to have a true understanding of why credit scores matter and how significantly they can impact one’s day-to-day budget,” says Dennis Hebert, vice president of sales and business development for Granite State Credit Union ($308.9M, Manchester, NH).

To address this need, Granite State offers interactive sessions for all employees of its affiliate business partners throughout the state. The credit union expects attendance at these sessions to reach 400 individuals by the end of 2012. Such positioning of the credit union as an educational resource bodes well for attracting future business from potential membership pools.

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“The program has been so successful that we now offer free credit reports to all of our members, complete with a private one-on-one review,” Hebert says. 

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