ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, March 10, 1996 TAG: 9603080043
SECTION: BUSINESS PAGE: G2 EDITION: METRO
SOURCE: KAREN GULLO STAFF WRITER
Credit-card issuers once shunned college students, low-wage workers and people with spotty credit records, but today they're chasing after riskier borrowers as never before.
Bankers say they're just trying to make credit available to everyone. But lawmakers, educators and consumer advocates say greedy lenders are setting traps for the most vulnerable people.
``The tendency to encourage irresponsibility is turning the banking business on its head,'' said George Ritzer, a professor at the University of Maryland and the author of a book about the social impact of credit card growth.
``It's gone from a business of inducing people to save to inducing people to go into debt,'' said Ritzer.
Consumers least equipped to carry heavy debt loads - such as young people and those with lower incomes - are among the fastest-growing segments of the credit card industry, studies show.
In 1983, about 11 percent of families with incomes under $10,000 had credit card debts, according to the Federal Reserve. By 1992, nearly 24 percent owed money on plastic.
With the propensity to borrow more and pay it off slowly, these customers are a lucrative source of profits for lenders.
Credit come-ons like Signet Bank's Loan-By-Check program are common today. The bank sent out unsolicited, pre-approved checks for $5,000 or more to thousands of consumers. All they had to do was sign the back of the check to activate a loan with lower-than-average interest rates.
The program was a success - thousands of people signed on. But Signet noticed that only people with good credit accepted the offer. So the bank did a second wave of mailings, and this time it targeted people with more tenuous credit records to test whether it could get more takers and still be profitable.
More people did sign on - the bank added $175 million in new loans, analysts said. But, not surprisingly, many borrowers couldn't handle the debt. Thousands defaulted, leading to credit losses of $5.7 million last fall - an 11 percent annualized loss rate, according to analysts. That's more then three times the average loss rate on most installment loan programs.
Spokeswoman Teri Schrettenbrunner confirmed that some loans went bad, and said the losses were just the cost of doing business. The test will help Signet develop better loan offerings, she said.
Schrettenbrunner declined to disclose the criteria used in the second mailing.
The losses didn't hurt Signet much - the bank's total profits jumped 41 percent last year to $118.3 million, after adjustments.
Signet is not alone. Many credit card issuers are testing products aimed at riskier customers - and raising eyebrows. MBNA Corp., a Wilmington, Del., credit card bank that's one of the nation's largest issuer of plastic, is under review by the credit rating agency Moody's Investors Service.
MBNA specializes in offering credit cards to consumers who are members of professional associations. The groups endorse the cards and get a cut of the profits.
But three years ago the bank began aggressively marketing cards to consumers who don't belong to a professional group. Moody's is worried that the new accounts - the bank added 6 million last year alone - might have a higher default rate.
MBNA said it hasn't taken on riskier customers and says its loan losses are among the lowest in the credit card industry.
Higher loan losses have so far not hurt the nation's banking industry. Because they're making many small loans, banks are insulated unless a lot of people default.
But the losses do take a toll on families.
``We're at a point were people are having to make choices between paying off their debt or heating their homes,'' said Rep. Joseph Kennedy, D-Mass., in an interview.
Kennedy is pushing for legislation requiring banks to let consumers pay off debt at the rate they incurred it at as long as they agree to cut their cards in half and not use them.
Bankers contend it's not their fault if people who can't afford it sign up for credit cards and then have trouble paying their bills.
But experts like Ritzer believe that by blanketing consumers with millions of direct-mail offers and targeting those with unsteady finances, banks are partly to blame.
With U.S. consumers now in hock for more than $1 trillion, he believes something must be done.
``Maybe what we need is a earning label that says ``Caution, credit cards can be dangerous to your economic health,'' Ritzer said.
LENGTH: Medium: 86 linesby CNB