Why Straight A’s and B’s Are Not Necessarily a Good Thing

Credit unions have an opportunity to reaffirm their original mission by broadly addressing the needs of lower-credit individuals relying on payday lenders.


Credit unions were created to a fill a void that existed because banks declined to serve those of modest financial means.  Over the years, banks have become less “elitist” and now focus on the same market that credit unions do. 

Yet a new void emerged because both banks and credit unions often have been reluctant to work with lower-credit individuals in need of funds.  Exploitative payday lenders are working hard to fill that void, but without the compassion and commitment to financial education that credit unions see as an integral part of their mission.

Today’s Situation

Credit union profitability is pressured in today’s environment of lower interest rates, a practically inverted yield curve, and rising expenses.  The net interest margin is near an all-time low at 3.19%.  Because of these challenges to the bottom line, many credit unions have become more risk-averse in deciding whom to lend to.

This risk aversion is evident in credit union data.  Delinquency rates are very low at 0.58%, implying declining risk in the loan portfolio.  Along the same lines, the ratio of provision for loan loss to average assets stands at 0.30% -- the lowest level since 2001.  Some of this is attributable to better credit decisioning and to the increasing share of mortgages in loan portfolios.  But the thriving payday lending industry proves that there is a significant slice of consumers who don’t have a financial home due to poor or no credit. 

Who Are We Turning Away?

Banks and credit unions use FICO (credit) scores to determine with whom they want to do business.  Potential borrowers are given a label with their credit, anything from A and B (good credit), to C, D, and F (weak or outright bad credit).  Those with high to average scores usually have no difficulties receiving loans and other services, while those with lower scores are usually flat-out denied and have to look somewhere else.

Because these denied borrowers are often looking for short-term loans to tide them over to the next paycheck, rather than searching for more standard loan products, they often reach out to a payday lender.  Payday lending has experienced exponential growth during the past several years.   As of 2000, approximately 7,000 payday loan offices existed around the country.  According to the Center for Responsible Lending, that number grew to 22,000 in 2003. 

Why Should Credit Unions Care?

Focusing on A and B credit individuals is not a problem.  These creditworthy borrowers should make up the bulk of a healthy loan portfolio.  Yet the explosive spread of payday lending proves the needs of C, D and F-credit individuals.  Can credit unions safely do more to help this group?  Of course more risk is involved, but the risk can be addressed without compromising the overall health of the credit union system through pricing, loan limits, and capping high-risk loans as a portion of the loan portfolio. 

If credit unions take time to create relationships with individuals who are hampered by their FICO scores and educate them about their finances, we can offer them a high rate loan tailored to their credit history and individual story, and gain some of the most loyal and thankful members the credit union movement has ever seen.

To learn more about lending strategies and helping fulfill your credit union’s mission, check out Your Number One Member Education Opportunity of the Next Five Years, by credit union lending expert Brett Christensen, brought to you by Callahan and Associates.




Sept. 18, 2006


  • Good article. I had an ethics professor tell me once that A and B students are usually those that conform to the rules and are afraid to take risks, that C and D students are those that make better entrepreneurs because they are taking risks and pushing the envelope. I wonder if there is a comparison that can be made between A and B students and A and B paper? Has anyone done this study? Are credit unions turning aware potential entreprenuers who might become very loyal to the credit union movement?
    Heidi Martin
  • Great message - when someone needs a loan just because their credit union or another mainstream financial institution says no, it does not mean the person is going to stop trying to get that loan. Instead of flat rejection, looking beyond numbers and working with the member could be a great way for credit unions to grow and serve a clear need.
  • Cute title
  • It's time for the experts to enlighten the credit union industry regarding the fact that the best delinquency and chargeoff rates are not the lowest ratios. That was partially true when we were single rate lenders, however, there can be no justification for risk based lending if your delinquency and charge-off ratios don't increase, (assuming you had a competitive single rate strategy in a typical A or high B score band). The science of portfolio management demands that you actually take more risk if you are going to charge higher interest rates (C & D). Guess what? More risk is riskier - and those words actually have a meaning. So, stop measuring loan risk success only by delinquency ratios and chargeoff ratios and look at your margins in each risk tier. I'd be ashamed to have the lowest delinquency and charge-off ratios in this era of "serving the underserved". There's no going back to old days. IIf you are scared to death of delinquency, you are driving your members to the wolves for their loans. Delinquency must be measured, understood, and controlled, but, no one can judge the profitability of a portfolio by looking at delinquency factors alone. Gearing a loan strategy toward low delinquency is going to put many credit unions out of business. Nationally, consumers credit proflies are becoming worse partially because of the new credit information providers who do not report psoitve payment flows, but they do report slow-pays which affect Beacon scores. How many articles dow we need to read that tell us credit scores, and debt repayment habits are deteriorating before we ask ourselves- just who are we going to lend to?
  • I have been in the CU industry for almost 30 years now and it has never been more competitve than it has become over the past five. Unfortunatly as much as I hear "the woes" of today's CU executives it seems that they are reluctant to act in their own favor. Especially when it comes to Non- Prime Lending. I know that the regulators don't make it any easier to venture into this market. But what happen to "people helping people" it seems more like "people helping prime people" today.