Inactive credit card accounts are defined as credit cards that were approved, opened and never used by account holders. They also include credit card accounts that were approved, opened, utilized by account holders but don’t have a balance for the last six to 12 months. Inactive credit card accounts pose several challenges and opportunities to lenders.
A review of inactivity rates of credit card portfolios of credit unions across the United States as of March 2018 shows that inactive accounts comprise approximately 11 percent of total accounts on the books. The average credit line of inactive accounts is $8,700. (Data were extracted from Experian’s File One™ database using a sample of credit card accounts with credit unions across the United States as of March 2018. Sample size is approximately 600,000 credit card accounts.)
Why do credit card accounts become inactive? One potential reason for inactivity is the convenience of securing a credit card during demand deposit account (“DDA”) opening processes. Lenders today may prequalify or preselect a customer quickly and efficiently for a credit card while a customer’s request to open a checking account or deposit account is being processed. Lenders benefit from this choreographed process with no to very minimal additional effort and time requested from the customer. The removal or significant decrease in friction costs — such as requiring additional customer information that previously would have deterred a customer from proceeding with the credit card application — gave lenders the advantage of processing more applications. (Schruder, Kyle. Feb. 26, 2018. The Top 5 Behavioural Economics Principles for Designers — Bridgeable blog. https://uxplanet.org/the-top-5-behavioural-economics-principles-for-designers-ea22a16a4020.) Because of this convenience, some customers say yes to obtaining a credit card even though they had no intention of securing one in the first place. In behavioral economics, this may be identified as the “yeah, whatever” heuristic. People take the option with the least effort or the path of least resistance. (Thaler, Richard H. and Cass R. Sunstein. 2009. Nudge Improving Decisions About Health, Wealth, and Happiness. New York: Penguin Books. Pages 35, 85.) With low commitment to the credit card, customers who are approved will receive the new plastic and forget about it.
An active credit card user may become inactive because the features, benefits and rewards are no longer relevant for their current financial needs. For example, a merchandise purchase or balance transfer promotion has expired and was paid off. Rewards are less attractive compared to other credit card offers in the marketplace.
Lack of lender engagement activities may also lead to inactivity. For example, there are no marketing campaigns with promotions or special rewards offers. Revolving accounts with very low credit lines aren’t given credit line increases even though credit risk is acceptable, and accounts generate good interest income.
The challenges to lenders with a large segment of inactive accounts include the direct cost of contingent liability. A percentage of unused credit lines is classified as contingent liability in the balance sheet. If contingent liability is reduced, then funds may be used to invest in more productive activities.
In the absence of analytics and deep understanding of various customer behaviors in the portfolio, it can become costly for a lender when inactive accounts are included in all kinds of marketing campaigns. Marketing budgets are limited and ought to be used wisely to target segments with high expected returns and to achieve specific and well-defined objectives.
Inactive accounts may also come with credit risk challenges. Some customers designate certain credit cards as emergency credit cards. That is, these cards will be used only in emergency situations where payment is needed immediately, and no other funds can be easily accessed at such time. Some situations are significantly more serious and may be accompanied by deep financial stress. During these times, inactive accounts are utilized and may result in collections or charge-offs.
How can lenders handle the challenges of inactive accounts? An inactive account strategy that uses data and analytics is very helpful and prudent. Determine which accounts are never active or were inactive within the last 12 months. Identify which accounts pose elevated credit risk. There are various interventions that can be designed to improve card activation, which may include marketing campaigns and account management strategies including credit line options. If inactive accounts were included in marketing campaigns or account management strategies, then track the performance. These performance reports will provide the rationale and guidelines for further action, which may include account closure.
Evaluate the multiple relationships of the customer with the lender and estimated cardmember value. Survey the inactive accounts and obtain feedback regarding the reasons for lack of card usage. Those insights will help identify areas for improvement and drive new initiatives.
We have seen that inactive accounts aren’t a trivial component of a credit card portfolio. There are real costs and risks associated with inactive accounts. They also provide opportunities for improving card features and benefits and ways to continue engaging existing cardmembers.