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Many Banks Are Tightening Credit Card Criteria as Bad Debts Mount

July 22, 1996

NEW YORK (AP) _ Consumers should see a let-up in the flood of offers for credit cards and will find it harder to qualify for plastic as banks tighten standards in an effort to reduce loan problems created by a consumer borrowing binge.

While second-quarter earnings reports showed that banks are piling up more bad credit card debt, they also revealed that banks are getting pickier about who gets their cards and taking other precautions to prevent the debt problem from getting out of hand.

A key to the rising bad debts is the lowering of standards for spreading around the plastic. Credit card issuers score applicants based on their answer to numerous questions on the application form.

As banks rushed into the credit card business in recent years, they lowered the minimum score that an applicant needs to get a credit card, to about 640 from 670 said Robert H. Hammer, chairman and chief executive at R.H. Hammer Investment Bankers in Thousand Oaks, Calif.

But banks surveyed by Hammer in June and July reported raising the minimum score by an average of 10 points, with mid-sized banks tightening the most, an average of 20 points. ``This is the first time we’ve seen those numbers rising,″ Hammer said, ``and it portends good things for the industry.″

A jump of 20 points ``suggests it will be moderately more difficult to get credit″ in the future for people with marginal records of paying off debts, Hammer said.

The actual scores used to rank an applicant’s creditworthiness are based on a mathematical system that banks keep secret. Banks don’t divulge cutoff numbers and often change them.

Hammer also said so-called ``monoline″ card issuers, banks that specialize in credit cards, are applying more sophisticated technology to target credit card solicitations to consumers more likely to pay their bills. In particular, he said Capital One Financial Corp., Advanta Corp. and Household Finance Corp., as well as consumer banking giant NationsBank, are smarter about marketing their cards.

Banks are also getting tougher on late payers. Chase Manhattan Corp., for example, which reported a rise in bad credit-card debts in the second quarter, said it was beefing up its collection staff across the country.

The warning signals hit home on Wall Street when Bank of New York said June 19 it would add $350 million to its reserves for bad credit card debt. That stirred up worries that second-quarter earnings reports would show a trend of mounting credit card problems throughout the banking system.

Earnings reports over the past two weeks did in fact show a rise in bad credit card debts. But they also showed that many banks are moving to correct the problem.

``The second-quarter numbers on asset quality were far less onerous than earlier expectations,″ said Frank J. Barkocy, a banking analyst at Josephthal, Lyon & Ross, Inc.

The tighter measures are not likely to improve the bottom line at banks until next year, and bad credit card debts are expected to continue growing in the second half of 1996.

``Not to minimize the fact that we did see, in many instances, increases in credit card charge-offs and delinquencies. But I think many banks have a pretty good handle on the problem.″

The amount of credit card debt written off as uncollectable crept up to an annualized 4.2 percent of total outstanding credit card debts in the first half of this year, from 4.1 percent in 1995. Charge-offs were 1.9 percent of all credit card debt in 1983 and peaked at 4.9 percent in 1992, as a downturn in the economy prompted many more consumers to walk away from their debts.

Hammer said he expects charge-offs to hit 4.4 percent of outstanding debt by yearend, but then begin to decline again in 1997.

Credit card portfolios are deteriorating the fastest at big regional banks, including First Chicago NBD Corp., Norwest Corp., Mellon Bank Corp., Barnett Banks Inc. and Comerica Inc. Barnett said it is considering selling its credit card portfolio or entering into a joint venture that would relieve its credit card debt burden.

Big national banks are also having problems. In addition to Chase Manhattan, Citicorp, the biggest card issuer, reported mounting losses in its U.S. credit card business.

Part of the banks’ problem is that in scrambling for a bigger piece of the credit card pie, they gave cards to consumers who cannot or won’t pay them back. And as the stigma of bad debts has faded, consumers are quicker than ever before to declare bankruptcy, leaving the banks holding the bag.

Rafael Soifer, a bank analyst at Brown Brothers Harriman Inc., worries that bad debt has grown alarmingly during a time of relative economic prosperity. The numbers could get much worse, he warned, if the economy goes south.

``The bankruptcy situation has not fully played itself out yet,″ Soifer said, ``and we still have the lurking issue of a possible (economic) downturn. If one of both of those things materialize, we’re going to have more problems.″

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