Credit card issuers increase scrutiny
Late paying can mean higher rates
Peralte C. Paul - Staff
Tuesday, February 5, 2002


Next time you're tempted to whip out the plastic, consider resisting the urge if you've been late on any payments.

The payment records of about 100 million cardholders --- half of credit card-carrying Americans --- are being more aggressively monitored by card issuers, industry experts say. Higher rates --- called repricing --- are hitting cardholders with splotchy credit records.

Sometimes card issuers are raising rates, lowering credit limits, or doing both in a pre-emptive move to lessen damage from the recession.

So now, it's not only pay the minimum balance and be on time. Many issuers --- Citibank, Discover, First USA and Household Bank among others --- are monitoring all their cardholders' accounts. Then, they are requiring cardholders to be current on all their other accounts to keep their current interest rate.

The reason: rising bankruptcies, an increasing number of uncollectible accounts, and fears about the impact of the recession on the bottom line.

Also, the technology for monitoring consumers' complete financial health on a real-time basis has gotten better, issuers say, allowing them to react more quickly to potential credit risk. The volume of consumer account reviews has doubled in the past year, said Paul Springman, group executive at Equifax. The Atlanta-based company is one of the nation's top three credit-monitoring firms.

Issuers, who have the right to change rates, in some cases have notified all account holders of the increased monitoring. Others have been informing customers, who have had late payments on any accounts, that their interest rates will go up.

"It's a direct result of the economy and what has happened to some of these other issuers like Providian, NextCard and CompuCredit," said Robert B. McKinley, chief executive of CardWeb.com, which tracks the industry.

Indeed, David A. Wyss, chief economist at Standard & Poor's, predicts this year is"probably going to be the worst year in history" for card issuers facing uncollectible debt. The average write-off rate is expected to climb to about 8 percent, roughly 3 percent more than the average 4.9 percent charge-off during the past decade, Wyss said.

Some issuers, such as Citibank, the nation's largest card issuer, established their policies following the sudden rise in bankruptcies in the late '90s, but only recently started implementing them on a larger scale.

"It's really that we're pricing for risk," said Maria Mendler, a Citibank spokeswoman."We believe performance on other creditors could be an indicator of delinquency."

Others, such as Bank One's First USA credit card unit, started the policy in the last year as economic conditions worsened.

"It's really a more proactive thing," said Thomas A. Kelly, a Bank One spokesman."As the economy has more challenges our customers will have more challenges, and we want to make sure that their level of credit is comfortable for them and for us."

But consumer advocates say raising interest rates on consumers who are behind on their bills will make it harder for them to pay off the debt.

If you default on payments to Household Bank's popular GM Card --- or any other creditor --- your interest rate could jump to 23.90 percent --- 7 points higher than the base rate on the card. That's a full 10.68 points higher than the average interest rate nationwide, according to Bankrate.com.

"It's hard to draw the line between reasonable pricing and self-fulfilling prophecies," said Jean Ann Fox, director of consumer protection with the Consumer Federation of America in Washington."That's just more likely to make it difficult for you to pay them."

And economist Wyss notes that the credit card industry isn't bleeding losses just because the average loss rate is up. Charge-offs were more than offset by the series of interest rate cuts by the Fed.

"Don't cry too much for the banks," Wyss said."They're actually making more money on credit cards now than they were a year ago."

But issuers contend they have to be able to react quickly to changing consumer profiles.

At First USA, the nation's third-largest card issuer with more than $68 billion in credit loans outstanding, the charge-off rate in the fourth quarter of last year was 5.59 percent vs. 5.41 percent a year earlier.

However, charge-offs at American Express jumped 34 percent last year. Atlanta-based CompuCredit, which services consumers who have problem credit, said its net charge-off rate in the fourth quarter was 15.3 percent vs. 13.3 percent the year before.

"We all change a lot of things over our lifetimes, and some of those things cause us to carry more risk," said Ron Robine, chief credit officer at First USA.

"If I don't manage the credit, that means I'm forever tied to the credit position that person was in when they applied for the credit," Robine said, adding some cardholders have had their rates lowered as a result of the monitoring."Now we can make a good assessment of risk on a more perpetual basis."








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