Mortgage crisis spills over into credit cards

The luster on all those silver, gold and platinum credit cards is getting tarnished.

For the past few years, banks that issue credit cards have aggressively wooed affluent customers with lavish perks and fat credit lines. Now, that high-end strategy is coming back to bite the banks. There are growing signs that some of those consumers are having a hard time paying their bills.

It is the latest in a series of woes for U.S. financial institutions, which are struggling to contain a series of credit-related problems after years of strong profits. Banks have lost billions of dollars from soured home loans and mortgage-related investments. And defaults on commercial and industrial loans could rise later this year if the economy weakens further.

Investors and analysts got an in-depth look at the credit-card problems last week when Citigroup Inc. and J.P. Morgan Chase & Co. - two of the biggest U.S. issuers of plastic - issued fourth-quarter results that included billons of dollars in writedowns to cover mounting losses on credit cards and other consumer loans.

Bank of America Corp., which bought card company MBNA Corp. a few years ago, is scheduled to report results this week.

Bank profits have been pumped up in recent years by historically low levels in credit-card delinquencies and write-offs. Those levels had widely been expected to rise with the economic slowdown. The concerns intensified in recent days, when American Express Co. said it had experienced a sudden and broad-based rise in delinquencies in December.

Although Capital One Financial Corp. had also warned about growing problem loans, the AmEx development was viewed as even worse news for the industry because AmEx is well-regarded widely for its creditworthy customer base and sophisticated risk-management capabilities.

''This isn't an AmEx issue, it's an industry issue. We have started to see a spillover from the mortgage market and the weaker economy into credit cards,'' said Christopher Brendler, an analyst at Stifel Nicolaus in Baltimore.

A slowdown in overall credit-card growth during the past few years sent banks chasing high-end customers. The upscale cards - which offer amenities such as concierge services and access to popular events - pump up profits in good times because they carry higher fees for customers, as well as for merchants who pay banks a percentage on each transaction.

In recent months, banks have scaled back some of their promotional offers on less-attractive customers. For example, they reined in 0 percent balance-transfer gimmicks by adding on fees and shortening the time frame associated with them.

At the same time, however, they are flooding the mailboxes of their best clients with offers for higher credit lines and lower interest rates.

They are going after good customers such as Megan Bramlette (who is, coincidentally, a credit-card consultant), who says she received two letters from Bank of America reminding her that she hasn't been using her Chicago Cubs credit card - and then raised her credit line 20 percent. ''It's an aggressive strategy for a dormant card,'' said Bramlette, who works for Auriemma Consulting Group.

Industry analysts say card issuers are likely to start scaling back these types of offers. Banks have more flexibility to reduce credit lines to troubled credit-card borrowers, and to take other actions, than they do with mortgage customers who are locked into their loans.

Still, the rising delinquencies and charge-offs are likely to crimp bank profits at a time when they are under pressure. Card losses at Bank of America are expected to rise to 6 percent in 2008, from 4.9 percent in the third quarter, representing more than $500 million in incremental losses, or 12 cents a share, according to a report by Goldman Sachs banking analyst Lori Appelbaum.

The bank reports fourth-quarter results Tuesday.

The banks could find themselves under more pressure in their credit-card businesses later this year, especially if December's unexpected rise in unemployment is the start of a trend. The Labor Department said this month that the December unemployment rate increased to 5 percent from 4.7 percent.

''The higher the unemployment rate goes, the more areas of potential loan losses come to the banks,'' said John Augustine, chief investment strategist in Fifth Third Bancorp's private bank. He says it could take six months for rising joblessness to sting banks with higher defaults, meaning that the coming earnings announcements likely won't reflect the economy's true condition.