BY GEOFF BACINO
In a perfect world, every member who walked through a credit union door would have an excellent credit score. In the real world, every CU faces credit-challenged members. Several solutions exist for serving them. A simple four-step strategy is one of the most effective means of doing so.
The recent financial crisis has caused a drop in the average credit score of most Americans. According to Credit Karma, 77 percent of the credit scores in this country are in the “poor” to “fair” spectrum. As a lender, credit unions understand that this score is not a final indicator of the ability or willingness to repay, but it is a guideline. How can a credit union continue to provide services to those members who might be considered credit challenged?
One of the solutions is behavior-based scoring. This approach moves the credit union closer to the member and factors in the stability of previous account activity behavior. Behavior-based guidelines are a much more realistic tool to knowing and understanding your members. Effective underwriting is the natural secondary component in considering a program for members with less-than-stellar credit scores. Underwriting standards, which are based on the member’s depository history, allow “big data” to work for the member.
Some of the most effective programs that allow credit unions to better serve credit-challenged members contain four simple steps. These steps create more responsible member borrowers while helping members rebuild their credit score.
The four steps are:
1. Account Verification – The member’s account is verified against a pre-approved list provided by the credit union.
2. Payment Terms – The member is allowed to choose a payment plan that best fits his or her budget. Terms are limited to 6, 12 or 18 months.
3. Funded Loan – The member chooses the desired product, the loan is funded through the credit union and the merchandise is shipped directly to the member.
4. Payment Deductions – Semimonthly ACH payments are automatically deducted from the member’s account.