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.
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.
A slowdown in 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 and 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 zero 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. Banks have more flexibility to reduce credit lines or take other actions with troubled credit-card borrowers than they do with mortgage customers, who are locked into their loans.
"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 the coming earnings announcements likely won't reflect the economy's true condition.