Line management in credit cards
A critical task at existing customer is to increase revenue and minimize risk. Customers need to be engaged through ongoing offers as well as ensuring line is optimized per their needs. From a lender perspective, they want to optimize line as there is an inherent cost of capital and loss reserve they have to allocate as expense to provide credit limits to customer. To ensure optimal engagement, lenders have line management programs built into their lifecycle. The way how line can be increased can be into three types
- Proactive (Lender initiated) credit line increase: This is where on periodic basis lender can evaluate customer and give them a line increase. Customers do not have any involvement in this process and it is fully driven by lender where they look at customer credit history, performance and usage history of their card along with underwriting policy and qualify them for credit line increase. Typically, its courtesy and is targeted to increase engagement by positively rewarding good behavior in form of credit line increase. The upside of this approach is that you are able to give CLI to a large segment which have good engagement levels, however the downside is that a big chunk of customer may never use it and inherently lender is giving out higher lines with increased cost and exposure.
- Reactive (Customer initiated) line increase: This is on other end of spectrum where customers request for credit line increase by either calling in or requesting online. Traditionally this channel attracts more of high-risk customers and credit hungry customers as this is one of the means for them to stay afloat. Due to this, the underwriting and approval criteria tends to be more conservative. However, the engagement level and usage of line assigned from this channel is much higher than issuer based CLI as customer do have need for credit for some high $ purchase and hence drives higher revenue. Issuer can optimize line assignment and they may be able to assess exactly how much customer need and can even give them counter offers to optimize risk.
- Invitation based (Solicited) credit line increase: This is a sweet spot between Proactive and reactive line increase which utilizes best of both. In this program, lender can prescreen/preapprove a certain line and send as an offer to customer. Only customers that are interested in line increase can contact back and take the offer. This helps lender to give line increase to customer who a genuinely interested in it and save some of lending costs, however there might be an adverse select problem where typically high-risk customers will only respond back and hence the criteria for these programs also tend to be very conservative.
Lenders keep some time gap between line increase approvals as giving incessant line increase can lead to inadvertent exposure and can bring huge losses. It is important to monitor line increase and measure performance over time from a risk reward standpoint.
We will cover high risk line management (Credit line decrease) in a separate article
Thanks for reading. Please follow me on medium, LinkedIn and twitter(X) for regular updates.