Credit union depositors are running out of money and it’s a problem

60% of Americans can’t afford an unexpected $300 emergency, and credit union deposits have been dropping yearly for 3 decades. Members overspending is causing problems for credit unions and themselves.

In speaking with some credit unions, we highlighted 5 problems and ways our credit union partners can try to fix them.

Problem 1: 

Chronic Overspending Leads to Loan Defaults

Overspending Leads to Loan Defaults

It’s probably pretty obvious when you think about it. 😛

Chronic overspending leads to a higher risk of loan defaults because when members are in a constant state of overspending, they’re more likely to struggle with loan repayment. Here’s how this happens:

  1. Debt burden:
    Members who overspend rely heavily on credit cards or loans to cover their expenses. As a result, they accumulate a significant amount of debt, which can make it difficult for them to manage their overall financial obligations, including loan repayments.
     
  2. Squeezed cash flow:
    Overspending often leads to a stretched budget and limited disposable income. So when the time comes to repay loans, chronic overspenders might struggle to make timely payments due to their constrained cash flow. This increases the risk of delinquencies, late payments, and, ultimately, loan defaults.
     
  3. Unstable financial position:
    Chronic overspenders are more likely to experience financial instability. They may lack emergency funds or savings, making it challenging to weather unexpected financial setbacks. In such situations, they may prioritize immediate needs over loan repayments, increasing the risk of defaults.

How to help your members at risk of default.

While the risk of loan defaults due to chronic overspending is a concern, there are proactive strategies that credit unions can employ. These strategies help to mitigate this risk and support their members in achieving financial well-being. Some of these strategies include:

  1. Financial education and counseling:
    Credit unions can implement financial education programs that teach members responsible budgeting, debt management, and the importance of creating a reasonable spending plan. This way, members have the knowledge and tools to develop healthy financial habits, make informed decisions, and avoid chronic overspending.
     
  2. Personalized financial guidance:
    Another way is to offer personalized financial counseling services to members who exhibit signs of chronic overspending. Work with them to assess their financial situation, understand their spending patterns, and develop tailored strategies to better manage their finances. By providing personalized support, credit unions can help members address the root causes of overspending and reduce the risk of loan defaults.
     
  3. Budgeting tools and resources:
    Introduce and integrate budgeting tools and resources, like mobile apps or online platforms, into credit union member services. These tools can help members track their expenses, set spending limits, and stay accountable to their financial goals. Consider collaborating with fintech startups, like SwipeSwipe, to provide members with accessible and user-friendly solutions that promote responsible spending.
     
  4. Debt management assistance:
    Establish programs that provide guidance on debt consolidation, repayment strategies, and negotiating better loan terms. This is incredibly helpful for members who struggle with multiple debts due to chronic overspending. By offering assistance in managing their debt burden, credit unions can support members in regaining control of their financial situation and reducing the risk of defaults.
     
  5. Creditworthiness assessment:
    Credit Unions can develop criteria and guidelines for loan approvals that take into account a member’s overall financial health, including indicators of chronic overspending. By adopting a holistic approach to loan assessments, credit unions can ensure that loan products are aligned with a member’s ability to repay, reducing the risk of defaults.
     
  6. Ongoing member support:
    Foster a culture of continuous member support by regularly communicating financial wellness tips, providing educational resources, and offering periodic check-ins to discuss members’ financial progress. By maintaining an open line of communication and demonstrating the union’s commitment to members’ financial well-being, we can help them stay on track and reduce the risk of defaults.

Problem 2:

Your members spend too much, and you can’t lend to them.

spending money

When your membership is already in hock to the credit card companies, they can’t take out loans for essentials like cars and home repairs. This pattern significantly impacts loan growth in several ways:

  1. Reduced creditworthiness:
    Chronic overspenders often have higher debt levels and lower credit scores, making it challenging to qualify for loans. This reduced creditworthiness can limit the growth of our loan portfolio and prevent these members from accessing the credit they need to achieve their financial goals.
     
  2. Increased risk of defaults:
    Chronic overspenders may struggle to repay their existing loans due to limited income available after overspending. This increases the risk of delinquencies and defaults, negatively impacting the credit union’s profitability and ability to extend new loans.
     
  3. Limited loan capacity:
    Chronic overspenders may exhaust their loan capacity by already having multiple outstanding debts. Even with a reasonable credit score, their current debt obligations may prevent them from obtaining additional loans, resulting in limited loan growth opportunities for the credit union.

Strategies to Overcome Limitations on Loan Growth

Here are ways credit unions can empower members and ensure access to credit while maintaining responsible lending practices.

  1. Comprehensive financial analysis:
    Conduct a thorough analysis of each member’s financial situation. Look beyond credit scores and consider their financial health, including debt levels, income, and spending patterns. This way, credit unions can identify members struggling with chronic overspending and offer targeted support and guidance.
     
  2. Financial education and counseling:
    Develop financial education programs like workshops, webinars, and one-on-one counseling sessions that help them understand the impact of chronic overspending. This way, they’ll develop effective ways to budget and establish healthy financial habits. By empowering members with financial literacy, we can equip them to better manage their spending and debt, increasing their creditworthiness over time.
     
  3. Flexible loan products and terms:
    Tailor loan products for chronic overspenders by offering options such as debt consolidation loans. This allows them to consolidate high-interest debts into one manageable payment. Also, provide flexible loan terms, lower interest rates, and extended repayment periods to make loans more accessible and reduce the risk of defaults.
     
  4. Credit-building programs:
    Implement credit-building programs that allow members to establish or rebuild their credit history. It can involve offering small loans or credit-builder accounts with controlled spending limits. By demonstrating responsible repayment behavior, members can gradually improve their creditworthiness, leading to increased loan opportunities.
     
  5. Collaborating with external partners:
    Partner with organizations specializing in financial coaching, debt management, and credit repair services. By working with external partners, we can leverage their expertise to help members overcome financial challenges and improve loan eligibility.
     
  6. Continuous member engagement:
    Promote member engagement for financial well-being. With regular check-ins, personalized communication, and wellness campaigns, you keep members informed and motivated. Consistently engaging and supporting our members helps them sustain responsible financial habits and increases their chances of loan approval in the future.

Problem 3:

Chronic overspenders don’t have cash in the bank

Don't have cash

Chronic overspenders often have little or no financial cushion. This has several implications for credit union members:

  1. Absence of emergency funds:
    Chronic overspenders allocate most of their income to immediate expenses, leaving little to no room for saving. This means that in the event of unexpected events like medical emergencies, car repairs, or job loss, they have no buffer for it. This exposes them to greater financial stress, leading to high-interest debt or, worse, depleting other assets to handle emergencies.
     
  2. Limited progress toward financial goals:
    With overspending, there are little to no funds for saving towards long-term goals, like homeownership, education, or retirement. Chronic overspenders may find themselves trapped in a cycle of living paycheck to paycheck, hindering their ability to achieve financial milestones and build wealth over time.
     
  3. Increased vulnerability to financial shocks:
    With sudden changes in income or economic downturns, chronic overspenders are left exposed. With limited savings, they’ll struggle to maintain their lifestyle or meet financial obligations, potentially leading to further debt or financial hardship.

Strategies for Overcoming Limited Savings and Emergencies

Here are some ways credit unions can play a pivotal role in helping members prepare for and overcome these challenges.

  1. Promote a savings culture:
    Incentives like higher interest rates on savings accounts or rewards programs encourage members to set aside a portion of their income regularly. By emphasizing the value of saving, credit unions empower members to gradually build their emergency funds and achieve their financial goals.
     
  2. Emergency fund guidance:
    Educate members about the recommended size of emergency funds (typically three to six months’ worth of living expenses) and strategies to gradually build them. Encourage automatic transfers from checking to savings accounts, making saving a consistent habit.
     
  3. Financial planning and goal-setting:
    Financial planning services help members set clear goals and create personalized strategies to reach them. By aligning spending habits with aspirations, members can prioritize saving, allocate funds accordingly, and work towards short-term and long-term financial objectives.
     
  4. Budgeting tools and resources:
    Integrating digital tools and resources like budgeting apps, financial dashboards, and educational content can empower members to track their spending, set savings goals, and make informed decisions. Collaborating with fintech companies like SwipeSwipe can enhance member engagement by providing easy-to-use tools for monitoring and managing expenses.
     
  5. Financial education on responsible spending:
    By teaching members strategies for curbing impulse buying, distinguishing between needs and wants, and setting realistic spending limits, credit unions can help members break free from chronic overspending habits and allocate more funds towards savings.
     
  6. Collaboration with insurance providers:
    Establish partnerships with insurance providers to educate members about the benefits of various insurance policies, such as health, homeowner’s, or disability insurance. By mitigating risks and protecting against unexpected expenses, members can safeguard their savings, reducing the strain on their finances.

Problem 4:

Obviously, they have less money in investments, too

credit union and investments

When your members don’t have any money, that harms your AUM. It also means they’re stuck in the hole they’re in because there’s no obvious way to recover their financial balance. This is what the spiral looks like:

  1. Insufficient disposable income:
    With little to no disposable income due to overspending, it’s challenging to set aside money for savings or make deposits into savings accounts. Without a savings buffer, members are ill-prepared for unexpected expenses or unable to achieve their long-term financial goals. 
  2. Increased debt burden:
    Because they rely heavily on credit cards or loans to maintain their spending habits, they accumulate high debt levels. This hampers their ability to save or make regular deposits, further intensifying the challenge of building up savings.
     
  3. Neglected financial goals:
    Due to limited savings and deposits, chronic overspenders often struggle to establish and work towards financial goals. This hinders progress and delays the achievement of significant milestones like providing a down payment on a house, funding education, or planning for retirement.

But you can help them with a few different products.

While chronic overspending can undermine savings and deposit capacity, credit unions can play a crucial role in helping members overcome these challenges and regain financial stability. Here are some effective strategies to consider:

  1. Budgeting and expense tracking:
    As previously mentioned, 
    educate members on the importance of budgeting and tracking expenses. Offer tools, resources, or mobile apps that make it easy to monitor their spending and spot opportunities for savings. This way, credit unions can empower members to make conscious financial decisions and allocate funds more effectively. 
  2. Financial coaching and counseling:
    Personalized financial coaching services can help members assess their spending habits and develop strategies for better financial management. This is how credit unions can offer practical guidance to reduce unnecessary expenses, prioritize savings, and establish healthy money habits.
     
  3. Automatic savings plans:
    Sometimes, sheer willpower isn’t enough. Promote automated savings plans where a predetermined amount is automatically transferred from a member’s checking account to a designated savings account regularly. This simple and convenient approach encourages consistent savings, especially when there’s a lack of self-discipline.
     
  4. Incentivize saving and deposits:
    Incentivize members who demonstrate good saving habits or make regular deposits. Incentives like higher interest rates on savings accounts or rewards programs with additional benefits for consistent savers will motivate members to prioritize savings and make regular deposits. 
  5. Financial education and workshops:
    With regular financial education workshops or webinars on the importance of saving and making deposits, members learn how to set achievable financial goals and strategies to reach them. This is how credit unions can empower members to build and sustain healthy financial habits.
     
  6. Loan options for debt consolidation:
    Help members free up cash flow with loan products to consolidate their high-interest debts into a single, more manageable payment. By providing a pathway to reduce debt, you enable them to allocate more funds towards savings and deposits.

Problem 5:

If all your members are broke, It’s probably affecting your community’s reputation.

Reputation

Chronic overspending can have long-lasting consequences that impact the reputation of credit unions in several ways:

  1. Loan delinquencies and defaults:
    With delinquencies and defaults in loan payments due to chronic overspending, news of these financial difficulties can harm the credit union’s reputation. People may perceive the institution as lacking in responsible lending practices.
     
  2. Negative member experiences:
    Chronic overspenders may experience financial stress, leading to negative experiences with the credit union. When members struggle to make ends meet or face difficulties obtaining loans, they may become frustrated and express their dissatisfaction openly. These negative experiences can spread through word-of-mouth or online reviews, potentially tarnishing the credit union’s reputation.
     
  3. Loss of community trust:
    Credit unions are community-focused institutions, and their reputation depends on the trust and confidence of the local community. Suppose members who chronically overspend publicly claim that the credit union is not effectively supporting their financial well-being. In that case, it can negatively impact public perception, erode trust, and damage the credit union’s standing within the community.

Strategies for Mitigating Potential Reputational Damage

To safeguard their reputation, credit unions can implement the following strategies to mitigate the potential reputational damage resulting from member’s chronic overspending.

  1. Responsible lending practices:
    To prioritize responsible lending, credit unions should conduct comprehensive credit checks, verify income levels, and consider debt-to-income ratios. These measures help assess members’ ability to repay loans and reduce the risk of delinquencies and defaults, enhancing credit unions’ reputation for sound financial stewardship.
     
  2. Proactive member support:
    Implement member support programs to assist with chronic overspending. Offer financial counseling, debt restructuring, and education on budgeting. By providing tailored support, credit unions can show their commitment to helping members overcome financial challenges and enhance their reputation as trusted partners.
     
  3. Transparent communication:
    To build trust and demonstrate commitment to helping members improve their financial situations, it is crucial for credit unions to maintain open and transparent communication with both members and stakeholders. This includes being honest about the challenges associated with chronic overspending and sharing the steps that the credit union is taking to address them.
     
  4. Member Advocacy:
    Advocate for members’ financial well-being. Engage with members to understand their goals and challenges and help them navigate personal finance. By showing genuine concern, credit unions can become trusted advisors and partners.
     
  5. Community engagement:
    Strengthen ties with the community through active involvement in local initiatives and events. This way, credit unions can reinforce their reputation as institutions that prioritize community well-being.
     
  6. Online reputation management:
    To enhance member satisfaction, credit unions should monitor and promptly respond to online feedback. Actively engage with members on social media and review platforms, addressing concerns and providing helpful information. By managing the credit union’s online presence, negative feedback can be effectively addressed, demonstrating the commitment to member satisfaction.
     
  7. Reinforce ethical values:
    Uphold and promote ethical values within the credit union. Ensure that employees adhere to ethical behavior in all interactions with members. They should also maintain a culture of integrity throughout the organization. By aligning actions with ethical values, credit unions can protect their reputation and reinforce the trust placed in them by members and the community.

Credit unions should take a more active role in helping chronic overspenders break free from the money trap they find themselves in. By providing support and resources to address chronic overspending in their members, credit unions can help to improve their financial situations, build healthier financial habits, and achieve long-term financial well-being.

This proactive approach helps credit union fulfill their mission of serving the community and also strengthens their reputation as trusted financial institutions. Additionally, by helping individuals break free from the cycle of overspending and limited savings, credit unions contribute to the overall financial health and stability of their members, fostering a more resilient and prosperous community.

Ultimately, by recognizing the challenges of chronic overspending and offering meaningful solutions, credit unions play a transformative role in helping individuals regain control of their finances and pave the way to a brighter financial future.

Further Reading

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