U.S. credit card pitches surge

By Peter Morton - Washington Bureau Chief, Financial Post

Timing, as Ryan Oliver knows only too well these days, is everything. And his could not be worse.

For three years, he has been borrowing money from friends and family to launch a high-performance seamless sportswear called Zensah.

And when he was just about to approach the banks this spring for a modest US$25,000 home equity loan on his US$650,000 Florida home to get the clothing line off the ground, the subprime credit crisis hit.

Mr.Oliver was turned down no matter which bank he went to. "I just got nowhere," he says from his headquarters in Hialeah near Miami.

Then the strangest thing happened -- he was flooded with credit card offers. "It was surprising really -- we are receiving an awful lot of offers," he says.

Mr. Oliver is not alone in receiving offers of credit cards after being turned down by conventional lenders.

One of the seemingly curious fall-outs from the still reverberating subprime mortgage crisis -- where credit to ordinary homeowners, even those with top credit ratings, seemed to dry up overnight -- is that credit card issuers have stepped up their efforts to convince already pressed American consumers to buy using even higher-priced credit.

Mintel International Group, a Chicago-based consumer, media and market research firm, said in a recent survey that direct mail credit card offers to subprime customers in the United States soared 41% in the first six months of this year compared to the same period in 2006.

London-based HSBC Holdings more than doubled its subprime credit card offers during the period, followed by Washington Mutual with a 35% increase and Capital One Financial with 18%. A subprime household is one with a low credit score of around 600 compared to the best possible rating is 850.

Yet during the same period, credit card offers to American consumers who have good credit slipped more than 13%.

The timing appears odd because the number of foreclosures across the country was just beginning to rise. According to Foreclosures.com, there are about 1.6 million homes across the country in the pre-foreclosure stage and nearly 1 million already at auction.

And there is no sign of change for at least 18 months, notes Edward Delgado, a senior vice president with Wells Fargo & Co. at a Federal Reserve Bank conference in Kansas City this week.

Other forecasters are even gloomier.

One group, called the Housing Predictor, said that home prices in some markets have fallen by 40% and that it will only get worse with some 5 million adjustable rate mortgages to reset by 2009.

"This is a national crisis," said Harry Reid the Senate Majority Leader Harry Reid, a Democrat from Nevada, in trying to push for legislation to protect homeowners. "Too bad it's taken so long to realize that we have a crisis."

With so many homeowners struggling -- and equity lines drying up overnight -- the obvious question is: Why are credit card companies pushing new cards to people who cannot afford a single-digit interest rate, let alone one hovering around 25%?

"Nothing surprises me any more in consumer lending," says Bill Cheney, chief economist at MFC Global Investment Management in Boston.

"Perhaps the issue is that now that sub-prime people can't get easy home equity lines, they're fair game for credit cards at even higher rates," he says.

Lisa Hrenek, a senior analyst at Mintel where the mailing studies are done, says another reason is simply the way the credit card market is being divided.

She said from Chicago that a credit-worthy household now has about five credit cards so few of those households are interested in getting new cards. (The average household credit card debt is about US$6,600.)

"That end of the credit market is really saturated so the rate of growth for new cards is slowing down," she says. "The mailboxes are stuffed."

About 5.2 billion credit card offers are mailed to Americans each year. In Canada, the number is around 218 million a year.

"So the game for credit card companies at that segment of the market has become 'let's steal from each other," she says, with credit card companies offering incentives such as airline points and other rewards.

That also leaves open a previous untapped and potentially vulnerable end of the market where consumers with little or, worse, no credit are looking for cards. It also exposes, at least to consumer advocacy groups, a segment of American consumers who can ill-afford the hidden costs of credit.

"These cards are being marketed to people who are no longer able to tap into their home equity," says Jean-Anne Fox, an advocated with the Consumer Federation of America.

She said the federation was successful in convincing Congress to limit the huge interest charges on payday loans -- some as high 780% a year -- offered to cash-strapped military men and women.

Often these payday and auto-title loan companies set up around army bases to offer high-priced credit to low-paid military personnel. Congress has now capped the annual interest rate on loans connected to military pay at 36%.

"But we were unable to get these subprime credit cards included," she said. "The banking industry has a powerful lobby on Capitol Hill."

Curtis Arnold, head of Phoenix-based Cardratings.com, also says he has no use for these subprime cards because of the huge and often hidden fees that are often attached.

"Credit card companies see this as a marketing opportunity since where are these people going to go for credit," he says. "We, as a consumer advocacy group, see it as a rip-off."

Many of the cards cap their spending limits at US$250 and then charge an annual fee of up to US$200. "You certainly can't go on a spending spree with that card," he says.

John Hall, a spokesman for the American Bankers Association, says it is unfair to label these subprime cards as a predatory. "The reality is rate equals risk," he says.

About 96% of credit card holders in the U.S. pay at least their minimum due amount each month, sparing them the high interest payment costs. But there are others who either have bad credit or history of making late payments that have to start rebuilding, he says.

"So for that small percentage of consumers, it is a way for them to get back on track," he says.

T.J. Marta, a fixed income economist at RBC Capital Markets in New York, agrees in consumer credit, at least, rates equal risk.

"The subprime borrowers are likely also adjustable rate mortgage borrowers, and faced with higher mortgage costs, the borrowers will have to 'rob Peter to pay Paul,' or put charges on new credit cards to pay their mortgages and their regular monthly spending," he says.

"For some borrowers, such a tactic will only delay -- and worsen -- the day of reckoning and the card issuers no doubt understand the risks and are charging interest rates to compensate for expected delinquencies."

Mr. Oliver, who says he was not in the subprime category but just a drive-by victim of it, says he was glad he was inundated with the credit card offers.

With new cards with lines of credit up to US$50,000 and agencies such as the Lending Club, he said Zensah -- which is Italian for "to be without" -- avoided having to go to venture capitalist companies that perhaps would end up owning his new company. Today, the New York Jets and Miami Heat are among his clients.

"The credit card offers turned out well for us," he says.

© Financial Post 2007

Originally Published: http://www.canada.com/nationalpost/story.html?id=630e40aa-c6e0-4937-ae72-2d8fee4bc663