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Credit Card Health: The Missing Piece of Financial Health

In the face of ongoing COVID-related financial stressors and shifting buying behaviors, the “Financial Health” conversation has become more relevant than ever. Now that almost 40% of U.S. households say they have faced “serious financial difficulties” as a result of the pandemic, banks and credit unions are beginning to realize that they need to become a value-add service provider beyond just holding and moving money. 

Noticeably absent from the conversation is the role that growing credit card debt plays in a person’s Financial Health. More than 50 million Americans increased their credit card debtcredit card health because of COVID, and only 15 major card providers own 85% of that debt. While these major card providers conspire to maintain this status quo, the 10,500 remaining financial institutions lack an entry point by which to help their customers and members. Plus as credit scores are jeopardized, the people most in need of coaching are the least “qualified” to take advantage of products that can help. 

Prioritizing Credit Card Health presents a big opportunity for banks and credit unions. Not only can they help customers and members optimize for financial health instead of debt, but they can also gain ongoing insights into their customers’ full financial life to drive new balance transfers and personal loans that help the institutions’ bottom line.  

What is Credit Card Health?

Credit Card Health is the ability to use credit cards in a way that minimizes fees, expands financial flexibility, and improves credit scores. 

Cardholders are able to use credit cards successfully for large purchases and to address short term liquidity shortfalls all while limiting time in debt. Another sign of good credit card health is the ability to maintain a majority of credit lines in reserve (unused) and have clear and attainable paths to pay off revolving debt.

Unfortunately, today’s credit card ecosystem is designed to optimize interest and fees, not health. This is because the major card providers have very little interaction with customers outside of their card relationship, so they are incentivized to maximize their revenue via high interest fees. The 2021 FinHealth Spend Report found that the average “Financially Vulnerable household spends 13% of their annual household income on fees and interest… before addressing housing, insurance, and basic needs.” 

Changing the ecosystem requires changing our behavior, since the minimum payment formula we see today exploits the behaviors that keep people in debt. Cognitive biases like over-optimism, risk-aversion, and anchoring are much to blame. Respectively, people expect to pay down their debt more quickly than they actually do, they are reluctant to use their available cash to pay off card debt in case of emergency, and they “anchor” to the minimum payment amount even when they have enough discretionary income to become debt-free more quickly. 

But younger generations are catching on, and they’re embracing credit cards in smaller numbers than the older generations. The average Millennial has about three credit cards, while the average Gen-Zer has only 1.8. This compares to 4.3 for Gen X and nearly five for Baby Boomers. Instead, the younger generations are gravitating towards Buy Now, Pay Later plans that are often interest-free and do not impact credit scores if paid on time.

This aversion to credit card debt could be temporary. But as we’ve watched traditional banks and credit unions lose 25% market share in the personal loan space, we have to consider that these trends could be part of a lasting behavior shift towards less credit spending.  

The new opportunity for banks and credit unions 

Waning interest in credit card debt and a sustained interest in traditional banking presents a new opportunity for banks and credit unions that have been shut out of their customers’ current card-bank relationships. 

We surveyed more than 2,200 credit cardholders asking how they’d like their primary bank/credit union to help them with their credit cards. Nearly all (88%) wanted support managing the subscription charges on their credit cards. Almost as important, 86% said they wanted help managing when their credit card payments are due.”

Actually help customers improve their Credit Card Health.

As banks and credit unions continue to digitize their services and reach younger generations, they are able to expose their customers to all the products that customers are not using today and fill in the gaps that the major card can’t. These institutions still own the lion’s share of banking relationships, and providing customers with a branded, one-stop-shop for banking and credit card payment planning only makes their services more valuable. Offering insights into the most efficient ways to repay debt and improve credit scores empowers customers to mitigate the risks associated with credit cards and maximize the benefit of building and expanding their credit histories.

Gain ongoing visibility into customers’ full financial picture to drive new balance transfers and personal loans.  

When banks and credit unions provide customers with products that serve as this “one-stop-shop” for debt reduction, they become privy to the customer’s full financial picture. Suddenly, they are able to personalize customer engagement and become first in line to refinance customer debt. This could help recoup some of the market share lost to FinTech digital lenders by creating more loan candidates among existing customer base, with improved risk assessment for underwriters that accounts for factors beyond credit scores. 

Taking advantage of the opportunity

When customers are able to use credit cards in a way that minimizes fees, expands financial flexibility, and improves credit scores, everyone wins. To prioritize Credit Card Health, financial institutions have to help address the underlying behavioral patterns that keep customers in debt and unable to engage with products or services that could significantly improve their portfolio. 

Third-party solutions like Nickels’ Credit Card Coach are already helping customers identify and stick to a path towards debt repayment, while providing financial institutions with valuable customer information. The product shares access to information about the customer’s financial portfolio—like outstanding credit card balances and recent payment patterns—to structure debt repayment plans and assess customers’ net cash flows as a complement to traditional credit scores.

Proactively coaching customers to control and reduce their credit card debt is a critical but absent part of the Financial Health conversation. Introducing opportunities to improve Credit Card Health will allow banks and credit unions to move beyond their primary service offering—holding and moving money—to help customers improve their overall Financial Health. 

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