When is good credit too good? Ask Gander Mountain

  • Article by: DAN BROWNING , Star Tribune
  • Updated: June 24, 2010 - 9:55 PM

Gander Mountain has filed suit, saying an Ohio bank that issues its credit cards wants to reject the most creditworthy borrowers.

Here's one you don't see often: a bank threatening to turn away customers who pay off their credit cards too quickly.

Gander Mountain Co. says in a federal lawsuit made public Thursday in Minneapolis that the bank that issues its "co-branded" cards is threatening to deny new applications from about 25 percent of the sporting goods chain's customers -- those with the highest credit scores. The St. Paul-based company wants a court order blocking the practice.

The bank, World Financial Network National Bank of Columbus, Ohio, said it loses money on such customers since they tend not to carry balances or incur late fees.

Experts said they've never heard of a bank turning away financially responsible credit card customers.

"Most of my clients, which are the top banks in America, are jealously guarding their better clients and finding ways to satisfy them as opposed to turning them away," said Robert Hammer of RK Hammer Investment Bankers in Los Angeles. "It's not something I've done in my 30 years in this business."

World Financial, which did not respond Thursday to a request for comment, has more than 85 credit card programs with retailers that include Limited Brands and Redcats USA.

Bill Ryan, managing director of New York research boutique Portales Partners, said World Financial's parent company, Alliance Data Systems, generates a lot of its revenue from what are referred to as junk fees, or late fees. Consumers with stellar credit usually have the wherewithal to avoid paying them, he said.

While it's true that banks don't make much interest from customers who pay off their cards regularly, Ryan said, that's offset somewhat by the fact that creditworthy cardholders tend to use their cards more often, generating transaction fees for banks.

Those customers also pay annual card fees and have negligible charge-offs, he noted.

"I have to admit, this is one of the first times I've seen a company refuse to write high-end credits," Ryan said.

World Financial issues two types of revolving credit accounts to Gander Mountain customers: co-branded cards, which carry a Gander Mountain logo and a major credit card brand such as Mastercard, and private-label cards, good only at Gander Mountain stores.

Under its contract with World Financial, Gander Mountain gets a $37 "bounty" for each new credit card account it opens, plus 80 basis points, or eight-tenths of a percent, of the amounts charged on the cards outside of Gander Mountain's stores.

According to the lawsuit, World Financial asked Gander Mountain to rewrite its contract to waive the $37 bounty for customers with FICO credit scores of 800 or greater, or it would only issue them the less desirable private-label accounts. The scores, which range from 300 to 850, are a measure of creditworthiness developed by Minneapolis-based Fair Isaac Corp.

Alliance Data Systems gave a PowerPoint presentation to Gander Mountain in May that was filed with the lawsuit. It says that "800+ FICO accounts are unprofitable" for the bank.

"Removing bounty makes these customers slightly profitable if not break even. Reduction in bounty estimated at $402K annually."

To offset Gander Mountain's prospective loss in bounty, the bank proposed a deferred-credit plan for first-time purchases of $499 or greater.

It estimated that would bring in $517,000, yielding a net profit to Gander Mountain of $115,000 after its loss of bounty payments.

Gander Mountain refused to alter its contract, prompting the bank to threaten to unilaterally impose its "alternative" private-label solution on July 1, the suit says.

"World Financial correctly admits that, as a result of its decision, some 25 percent of Gander Mountain customers that seek a co-brand credit card would be denied access ... solely on the basis that their credit score is too favorable," the suit says.

Lauren Bowne, a staff attorney with Consumers Union, said she hasn't seen anything before like the contract dispute between Gander Mountain and World Financial. But it shouldn't mean much to consumers, Bowne said, because "nine times out of 10" they have better credit card options than those offered by retailers.

Dan Browning • 612-673-4493

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