Banks pull squeeze play on credit cards

J.L. Fish thought she was a fine credit card customer, and that Wells Fargo shared that high opinion. That's why the Mankato retiree was stunned to see the bank raise the interest rate on her Platinum VISA from 5.2 percent on her June bill to 17.69 percent come July.

"I nearly fainted," said Fish, 61, who lives on about $1,400 a month from Social Security and a small disability pension. She has made the minimum payment each month without fail on about an $8,000 balance, she said. But the interest rate jump nearly doubled her monthly minimum from $115 to $198 --more than she can cover. So, she took the bank's offer for an "opt out" -- which involved canceling the card and then setting up a new billing schedule until she pays off her entire debt.

"I have never been late in my payments," said Fish, noting payments are automatically deducted from her bank account. "Why did Wells Fargo do this to me?"

The answer is bigger than Fish. Banks nationwide are sweeping across their credit card accounts and tightening lending standards -- leaving customers to face interest rate leaps, lower credit limits, and even canceled cards. A Federal Reserve Bank survey showed 83 percent of major card issuers tightening their lending standards in the third quarter of this year, up from 45 percent in the second quarter.

Economists partly blame the credit markets -- where banks buy money to lend -- which came to a virtual standstill as the world's stock markets crumbled. But others hear an ominous echo of the subprime mortgage meltdown -- with banks now backpedaling from similarly lax lending with credit cards that have left them with exploding losses.

"There is a credit card equivalent of a toxic subprime mortgage," concluded a report earlier this month by Gregory Larkin, senior analyst at Innovest Strategic Value Advisors, an investment advisory firm in New York. "This is precisely what we need to be looking at right now."

Credit card charge-offs -- debt written off as uncollectable -- are ringing alarm bells at the big banks that issue cards. The total rose to $4.8 billion in the second quarter of this year, up $3.1 billion from the same time last year, according to the Federal Reserve Bank. As a percent of the loans, Moody's Investors Service put the collective average at 6.82 percent this August, compared with 4.61 percent in August 2007. Moody's predicts a peak next year around 8.5 percent; Innovest puts it as high as 10 percent.

Target Corp., whose credit card portfolio totals $8.6 billion, this week said its charge-off rate in September was 10.1 percent. The company said it is tightening credit, even for some good customers in high-risk areas such as California, which has been hard hit by the housing slump.

Banks have many reasons to be nervous. Credit cards are unsecured loans, which means there is no house or car to repossess from a borrower in arrears. Card delinquencies track unemployment rates, which are going up. Two other economic measures taken together bode badly: credit card debt up 75 percent over the past 10 years, but real wages up only 4 percent. In fact, consumers are already paying smaller portions of their monthly balances: They paid 17.4 percent in August, down from 20.1 percent in August 2007, according to Moody's.

'Just a number'

But all of that has nothing to do with Dianna Kincade, of Maple Grove, who has seen her effort to protect her credit score backfire. Kincade, 58, was notified Oct. 14 that the credit limit on her Sears MasterCard was cut from $8,400 to $5,000 -- not because she had done anything wrong but because she wasn't using her full credit limit, anyway, she was told. Yes, Kincade said, but she had deliberately not canceled it because she knew that canceled cards ding your credit score. But so do lowered credit limits, she now laments.

Instead of dropping the credit limit on Erik and Kristin Ralli's $8,000 VISA card, Wells Fargo closed it entirely last month. Kristin Ralli knew they had a long history of good credit -- a FICO score above 800 at one point, nearly perfect -- and that they had never missed a payment on the card.

But she learned that a collection agency claim showed up on the Rallis' credit report early this year. The collection involves a medical bill the couple believe is unfair and they are challenging -- but that doesn't show up on the credit report. The Rallis believe that's unfair -- when there is a legitimate reason and their credit history otherwise is spotless.

"They just see 'collection,' and they don't care why," Erik Ralli said. "We're just a number on a computer readout."

The couple are especially confused because while all this was happening, Wells Fargo pre-approved them for a mortgage.

Wells Fargo declined to comment on any individual cases. At the American Bankers Association in Washington, D.C., spokesman Peter Garuccio said the credit market freeze-up is putting "downward pressure across all lending."

"But what still holds true is what always holds true, which is creditworthy customer can always get the credit they need," Garuccio said.

Subprime déjà vu?

Larkin, the Innovest analyst, faults banks for selling credit cards the same way they did mortgages: Pursuing aggressive portfolio growth and high yields at the cost of prudent risk management, giving cards to risky groups such as subprime borrowers and students. As one sign of the parallel, he points out that the more recent accounts -- in the past two to three years -- have double to triple the delinquency rates of older accounts during their first two years. Among the big issuers with problems ahead are Capital One, Bank of America and Citigroup, Larkin predicted.

Don't worry too much about the banks, said Michael Simkovic, a New York attorney and credit researcher. Any earnings drop is coming off the industry's record $40 billion in profits last year. And don't confuse charge-offs with losses, he said. Even if a cardholder doesn't repay $2,000 of a $6,000 loan, for example, the lender probably more than compensated with fees and interest payments along the way. "If they are doing their jobs well, credit card issuers might be seeing more charge-offs, but they will still be profitable because they price those risks upfront."

At Wells Fargo, for example, financial filings show its quarterly charge-offs climbing this year from 5.89 percent to 6.95 percent to 7.2 percent as of Sept. 30. But the bank also cites its credit card business as one part of its operations with double-digit revenue growth every quarter, year over year.

Consumer groups attribute the companies' strong profits to practices they want Congress to outlaw, including applying interest increases retroactively to existing balances, and raising interest rates for reasons unrelated to the consumer's record with that card.

The Consumer Federation of America tried but failed to attach a package of new limitations to the $700 billion bailout plan, legislative director Travis Plunkett said. The House passed the limitations, separately, but a similar bill is stalled in the Senate, Plunkett said. The Federal Reserve Board is considering some new restrictions as part of new regulations.

In Mankato, J.L. Fish said she's now facing a tough decision: Pay her credit card bill or pay her mortgage, both at Wells Fargo. "In my position, I don't know what to do."

H.J. Cummins • 612-673-4671