by Jamie Conrad
For over a decade, low Fed and prime rates have meant credit unions could maintain fixed loan rates without much squeeze on profit margins. Now, as these rates continue to rise, credit unions might consider incorporating a variable rate strategy into their portfolios. Credit card programs, which already face the challenge of rising rewards costs, could benefit from regular interest rate adjustments based upon changing prime rates. Below are three important reasons to consider a variable rate strategy.
Rising prime rates reflect the increase in borrowing costs financial institutions face. In late March 0f 2023, the federal funds rate rose 25 basis points and at least one more hike is expected for 2023 according to Forbes. Adjusting credit card interest rates helps credit unions account for their own increased expenses to maintain profitability as well as financial stability.
As the economy slows in conjunction with the increasing federal funds rate, consumer budgets become tighter and delinquencies increase. A healthy credit card strategy encourages responsible card use. By raising the cost to carry a credit card balance, higher rates encourage users to pay off these balances faster and be more careful of when and how they use their cards. Responsible card use helps reduce delinquencies while the extra income from increased rates can cover potential losses if defaults happen.
Liquidity is vital to overcoming the challenges of uncertain economies and well-managed balance sheets lead to healthy liquidity. Variable credit card interest rates help counter costs and make up for low-yielding loans credit unions may have on their balance sheets, cultivating healthier liquidity that puts credit unions in a stronger position to face the economy’s fluctuations.
Making the bold move from fixed to variable rates for credit card programs, and other lending services, can seem counter intuitive to credit unions who are known for their low loan rates, but it can have a positive overall impact. Variable rates help credit unions maintain financial and lending service stability, ultimately benefiting cardholders and all members. This strategy allows your credit union to remain profitable, manage its risk exposure, and keep its liquidity strong to meet the challenges of the current economic landscape.
Switching to a new strategy may also seem like a daunting task, but once over the initial hurdle, it can become a familiar part of your credit union’s portfolio. Variable rates, in fact, can encourage more regular portfolio reviews, which themselves are a vital part of financial stability and risk management. Working with a partner like a credit union service organization can help make the transition from fixed to variable rates smoother for your credit union while also helping with your portfolio review.
(Originally Published on CU Insight)