As Credit Card Debt Hits New High, PALs Reassert Their Value for Credit Union Members


Monthly bills and unexpected emergencies have been known to surprise. Rent due, and your credit union member found themselves with more month than money; tire blows out on the freeway and they don’t have funds available for the tow truck, much less the costly fix.

If consumers were asked whether they could get approved for, say, a $700 loan with a lesser fee, do you think they would be intrigued?

It turns out a growing number of American consumers are taking that offer. According to Pew Charitable Trusts, assisted by digital automation and access federally-chartered credit unions issued a record $227 million in small-dollar loans in 2022 through the National Credit Union Association’s (NCUA) Payday Alternative Loan (PAL) program, up 30 percent from 2019’s total of $174 million.

This increase in affordable, small-dollar loans benefits consumers in the fact that each loan represents hundreds of dollars in potential savings in contrast to high-cost predatory payday lenders, rent-to-own, check-cashing, or other similar outfits. Such growth means more low-income members or consumers with limited-to-no credit history have the opportunity to borrow funds quickly to cover urgent or unexpected expenses.

“This is really a watershed moment for financial inclusion,” said Alex Horowitz, principal officer of the consumer financial project at Pew Charitable Trusts. “For customers who have been living paycheck to paycheck and haven’t had access to affordable credit before, this is a game changer and can be a major improvement in their household budget.”

Under federal rules enacted in 2019, application fees for the NCUA’s PAL and PAL II programs were capped at $20, while the maximum annual percentage rate is 28 percent. That means taking out $500 for three months with a PAL would cost no more than $44, Pew explained, “compared to the average of $450 to borrow that same amount via payday loans.”

NCUA Chairman Todd Harper told Pew Charitable Trusts the PAL program is meeting an obvious need.

“The rapidly changing rate environment has not slowed the rising demand for small dollar, short-term loans at federal credit unions,” Harper said. “With the help of technology, credit unions are being increasingly responsive to this need while operating within current interest rate caps, adhering to the NCUA’s updated supervisory guidance for interest rate risk, and remaining committed to meeting the financial needs of their members – especially those of modest means.”

While credit card debt hits a new high, PALs remain a financially healthy solution

The rush of PAL activity in 2022 reflected economic conditions stemming from inflation, unabating recession worries, and rising interest rates which put the squeeze on consumers’ wallets. An unfortunate—and convenient—solution for consumers? Just throw it on the credit card.

Credit cards are one of the most common, if not the most common, financial products in America. They provide the majority of short-term credit for families despite the havoc they can cause on FICO scores if not managed properly. Interest rates on credit cards have risen considerably, with average rates exceeding 20 percent after registering at just over 16 percent in August 2022 and 14 percent the prior February. Given current trends for the 175 million American consumers with credit cards, the CFPB approximates that outstanding credit card debt could set further records, even reaching $1 trillion.

High-interest charges represent the most obvious way credit card debt can cost your members money and short- and long-term financial health. But there are plenty of other ways poor credit management can haunt your financial well-being.

In the end, if members carry debt on their credit card accounts and a higher utilization rate exacerbates a drop in their credit score, their financial health may face dire repercussions in the future. Further, a drop in one’s credit score due to high utilization rate on their card could even result in a rate increase on the credit, as many credit card providers may reprice or adjust the rate on the card at set times based on the borrower’s updated credit score.

This is where the underutilized PAL from your local federal credit union can work its magic. PALs are NCUA-approved, have significantly lower fees and interest rates, and can aid your members in avoiding endless cycles of credit card debt.

Offering a PAL can help lower-income members pay off credit card debt with a sustainable repayment schedule and begin to rebuild their financial health and credit scores with intention. Imagine your members’ faces when you show them what a little financial inclusion can do and how you helped them!


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