How The Credit Card Crumbles

Young members are shying away from credit cards. Here’s why winning them back requires looking beyond the product itself.

 
 

Credit card loan growth for all U.S. credit unions was up 8% year-over-year as of third quarter 2013, according to Callahan & Associates’ Peer-to-Peer analytics. Although this is positive news, it hides the fact that for young adults, the appeal of a new credit card isn’t what it used to be. According to 2012 FICO statistics, the average credit card balance of individuals 18 to 29 has dropped by roughly $1,000 since 2007. What’s more, approximately 16% of consumers in this age group don’t even have a credit card; that’s an increase of roughly 7% from 2005.

FICO partly attributes this drop to the additional requirements for borrowers younger than 21 put forth by the Credit CARD Act as well as to the student debt that is causing many young borrowers to become overleveraged early on. Unfortunately, by cutting all ties with credit cards during their financially formative years, young consumers might also fail to build the responsible usage experience and credit history needed to manage larger commitments, such as an auto or mortgage loan, later on in life.

There’s no fail-safe way to quickly reverse this trend, but encouraging plastic usage early on, choosing rewards that speak to Gen Y, and creating solutions that make small businesses more card friendly can all help increase this age group’s comfort with credit cards.

Create Stepping Stones

Getting plastic of any kind into younger members’ hands early on is an important steppingstone to cementing active credit card use later on. For some institutions, branded prepaid cards are the easiest way to start that process. Prepaid cards come with built-in safeguards that can help a young spender avoid trouble; but they also include certain fees just for the ability to use the card.

Debit offerings teach individuals how to spend responsibility. They also off the credit union the opportunity to implement a reasonable fee structure that can ultimately help modify bad behavior early on in the relationship. Many credit unions also offer prepaid-alternative programs that include a free ATM or ID card for children, a free debit card for teens, and finally the ability to apply for a Visa credit card for members aged 18 to 24.

Michigan Community Credit Union ($120.5M, Jackson, MI) issues credit cards to members who are younger than 18 and have parental approval and a joint signature. For the credit union, which has grown its unsecured credit card portfolio roughly 8.5% year-over-year, the option creates a safety net for teens that allows them to build their credit scores and teaches them about responsible spending — valuable benefits for a young member about to start college or life on their own.

Rethink Rewards

According to a 2011 study by Walden University, 81% of Gen Y individuals reported having donated money, goods, or services that year, making this the most common form of social action among that demographic. For this reason, it’s not difficult to see why credit card products that help young users support issues they care about might be better received and have higher usage than those that do not.

Signal Financial Federal Credit Union ($319M, Kensington, MD) has a "Share The Road” Visa to promote advocacy, resources, and education for area bicyclists. It also has a Cooperative Development Foundation Visa, which provides support and assistance for a wealth of economic and social causes.

Likewise, by working with its reward program provider to offer what it calls “The Care Card,” TECU ($70M, Wichita, KS) gives its members the ability to donate points earned to any charitable organization they choose.

“We realized our Generation Y members are passionate about giving back to their communities,” said Kelly Martin, the credit union’s associate vice president of operations, in a press release. “Our goals were to entice our current cardholders to use the card as well as capture the Generation Y audience and make The Care Card top of wallet for them.”

Although factors beyond this card product and membership demographic are at play, TECU’s unsecured credit card balances were up 58% year-over-year as of third quarter 2013.

Become A Payments Enabler

According to an Intuit GoPaymentsurvey, roughly 55% of the nation’s small businesses do not accept credit card payments. They either don’t want to pay the fees or don’t have the equipment and knowledge needed to handle card processing. Add to this the fact that Gen Y in particular flock to such businesses — according to UK-based SEO company BrightLocal, roughly triple the amount of U.S. individuals in that age bracket reported seeking out small, local merchants online almost every day compared to their middle aged counterparts —and credit unions have a golden opportunity.

Gen Y doesn’t use cards and small businesses don’t offer the option. But by better supporting these merchants’ card processing needs, credit unions can facilitate better relationships with business owners — a full 8% of which are Gen Y themselves, according to the Kauffman Foundation — and encourage more card use among membership of all ages.

America First Credit Union ($5.8B,Ogden, UT) gives away cobranded mobile payment processing devices to its small business clients as way to cement these relationships.  Similar to Square, the device plugs in to any tablet or mobile phone and allows the user to process card transactions — as well as phone and email orders — more quickly and efficiently, says Blake Weathers, the credit union’s vice president of business lending and account services.

The credit union has offered the device since September 2013, and approximately half of its roughly 800 business members use them. Merchants pay per swipe at a rate that is 10 basis points lower than competitors and 35 basis points lower for card not present transactions. Plus, small businesses that earn $2,500 a month or less can avoid paying extra fees for their processing.

“We’re just starting to market this and expect it to grow even faster in the future,” Weathers says. “Beyond cost savings, the other advantage to this over other mobile payment competitors is that both the credit union and our merchant services provider can offer round-the-clock, local customer service to these businesses.”

As with many credit union products, it seems future success lies in the hands of the younger generation. And today’s younger generations do things a bit differently than their predecessors. One thing that never changes, however, is members need a financial institution they can trust and rely on to make decisions that are in their best interest. Credit unions that offer programs that encourage smart, responsible credit card usage today will find they have loyal members tomorrow.