Following the introduction of the Credit Reform Act which was implemented in February 2010, credit card issuers were aware that their profits would be hit. Measures were introduced to give consumers increased clarity regarding products and certain practices were curtailed, such as luring new customers in with low introductory rates and then increasing them. Lenders had to accept restrictive lending practices which were more responsible than their previous practices.
Fico, the corporation which sells credit scores to lenders, issued pertinent advice to lenders on how to deal with these changes. Some of the Fico advice focuses on identifying the customers whose loyalty is worth retaining and those who are high risk, and the different ways the two groups should be managed.
One excellent move Fico suggested is that lenders do not merely look for ways to comply with the letter of the law in regard to the new reforms, but to use them as an opportunity to educate low risk customers about credit usage, so they can make more responsible decisions.
Better financially educated customers have proven that they are more likely to keep up to date with payments and work to improve their credit ratings, and are thus worth retaining as a solid customer base. Through credit education programs Fico has already tested, results have shown that consumers can learn “how their behaviour impacts their costs.”
Through increased use of Fico analytical model tools lenders are able to more accurately identify lower risk consumers and should be encouraged to retain them and proactively seek to establish their loyalty. As well as providing them with financial education, lenders have the opportunity to cross sell other products to them. They are encouraged to take a softer approach to low risk customers by offering to change a due date if a customer pays late and increase credit limits for those who repeatedly use a high level of credit.
However the same tactics would not be applied to higher risk customers who would have more aggressive collection activity early, in an attempt to avoid those becoming two months delinquent on payments. Suggestions include immediately reducing the credit limit on high risk customers, who miss a payment, and freezing or terminating the account if it is the first payment.
Whilst lost profits may well be the card issuer’s first concern, it is encouraging to hear Fico suggesting that lenders do not just comply with the new reforms. Rather they are advised to use them as a method to manage their portfolios more effectively, thus reducing risky lending whilst learning to be more aware of customers needs.