A Hard Blow For Easy Credit

Rising debt has many credit-card issuers rethinking low rates

The days of easy money are ending fast for banks and other credit-card issuers. The costs of financing credit-card operations may rise for all banks, owing to record default rates and the alarming news from one of the hottest issuers, Advanta Corp. On Mar. 17, the Spring House (Pa.) company announced that with decreasing revenue and rising delinquencies, it will lose $20 million in the first quarter. It is also reviewing strategic alternatives, including selling the business. "This will drive up the cost of borrowing and cause [the companies] to revisit their pricing schedules for consumers," says Helene L. Moehlman, a senior director at the Fitch Investors Service rating firm. "Somebody's got to pay for it."

Card issuers may have brought much of this on themselves, what with their turbo-charged marketing efforts. Over the past five years, Advanta and others have flooded the market with offers of cards with "teaser" rates as low as 5.9%. In response, borrowers have sharply ratcheted up their debts, and many are now unable to pay them. Charge-offs for bad debts have been rising sharply. While Advanta charged off just 2.6% of its receivables as uncollectible at the end of 1995, the company now expects that figure will rise to as much as 7.5% of a $14.5 billion portfolio by the end of this year. Charge-offs at Banc One Corp. were 6.8% in 1996, while First Chicago/NBD Corp.'s hit 6.7%.

"CATCH A COLD." Advanta was not the first card issuer to feel the pain from rising delinquencies on card accounts. In February, Banc One promised to take steps such as making additional collateral available, if necessary, for some $2.7 billion in securities backed by credit-card receivables. Moody's Investors Service had threatened to downgrade the securities because of rising delinquencies. First Chicago and First Union have had to take steps. Judah Kraushaar, an analyst at Merrill Lynch, says investors still have an appetite for card-backed securities, but that could change. And Gerard Cassidy, an analyst at Tucker Anthony, says that all card issuers could be affected by a worsening market. "The only question," he says, "is which players catch a cold and which get pneumonia and die."

Rising credit-card costs could quickly turn into earnings problems for banks. First Chicago/NBD, for example, earned $347 million from its credit-card unit in 1996. But on Mar. 18, bank officials warned analysts that despite having scaled back solicitations last June, they expect bad loans to cause the unit to contribute less this year than the 32% return on equity it generated in 1996.

Advanta officials won't say whether or not they plan to throttle back on marketing efforts. They project that their outstanding card loans could grow from a current $12.5 billion to as much as $14.5 billion by yearend, a 16% rise. But it's possible some of Advanta's rivals will wind up capping Advanta's growth: If the company raises rates and fees on its cards and tightens credit standards, more aggressive issuers will undoubtedly step in to lure bargain-hunting customers away.

With a record 1.1 million personal bankruptcies across the country last year, some critics say that the tightening is long overdue. Still others even welcome Advanta's woes. "These losses are the most effective discipline on the market, on the issuers," says Stephen J. Brobeck, executive director at Consumer Federation of America. That discipline will mean pain for more card issuers--and consumers.