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Bloom is off credit card boom

During the last three years, Americans have received in the mail more than 8-billion offers for credit cards.

The good news, for the credit card companies, is that millions of people have taken the cards and borrowed more than ever before. The bad news is that a growing number cannot pay their bills, and the problem has been getting worse.

Many credit card companies recently tightened their lending standards in hopes of avoiding a plague of defaults and late payments. But instead of improving the situation, the latest moves by the credit card companies appear to be rippling negatively through the industry.

Last Monday, Advanta Corp., one of the fastest-growing credit card issuers, said it would lose money in the first quarter because as much as 7.5 percent of its loans outstanding had gone bad. Advanta, long proud of its independence, has hired an investment banker to consider, among other options, selling the company outright.

Advanta's woes reflect a wider trend. Last week, the American Bankers Association said 3.72 percent of credit card borrowers were behind on their payments in the fourth quarter of last year, up from 3.48 percent in the third quarter.

By comparison, 3.34 percent of borrowers were behind on payments in the fourth quarter of 1995. And the problem is likely to get worse because credit card borrowing has jumped sharply as Americans stretched to finance their Christmas and post-Christmas shopping.

Advanta, while perhaps worse off than many of its competitors, is certainly not alone. This month Banc One Corp. became the latest card issuer forced to bail out bonds backed by its credit card loans, because losses were higher than investors in the bonds had expected.

Now the card companies are preparing to get even tougher on customers, imposing higher interest rates and more fees on card users and giving them fewer goodies.

Advanta and others are starting to raise interest rates on riskier customers. They are increasing "nuisance" fees _ for being late on payments or going over a credit limit. And new credit card offers will have less attractive terms, like shortened periods in which low introductory "teaser" interest rates apply.

Other credit card companies have been raising fees and cutting back on such giveaways as discounts on new-car purchases or cash back.

"There is more risk in the system today than a year ago," said Alex W. Hart, Advanta's chief executive. The result, he said, is that lenders will try to make card borrowing more expensive in an attempt to maintain their lucrative profit margins.

For the economy, tighter standards for credit cards may slow spending by hard-pressed consumers, who have relied heavily on cards in recent years to maintain their living standards. But if consumers cut back and weaken the economy, credit card losses are likely rise.

While banks have started to tighten their lending standards, the moves have not yet had any effect on overall borrowing, which has continued to climb rapidly. The Federal Reserve said last week that consumer borrowing in January jumped $8.4-billion, to $1.203-trillion, the largest rise in two years, after increasing $3.8-billion in December.

"It's not going to look pretty for a while," Moshe Orenbuch, an analyst with Sanford C. Bernstein & Co., said. "The streets are littered with companies that have 7 percent loss rates." Orenbuch said that Advanta, long seen as one of the more sophisticated issuers, seemed to have slipped behind the industry leaders.

The rich _ and shrewd

In contrast to lenders who have run into trouble by lending to people with past credit problems, Advanta was known for seeking out more affluent customers, mainly offering gold cards with greater credit limits. The company had developed complex computer models intended to sift millions of tidbits of information about prospective customers to find those it believed would run up big balances and be able to repay them.

But Advanta's experience shows that lending to the affluent can be just as precarious as providing credit cards to low-income customers.

For a few years, Advanta's strategy paid big dividends as it racked up one of the industry's best records. But by the middle of last year, it was hit by rising losses and it slowed its marketing virtually to a halt.

The company had once told analysts that its revenue would rise sharply this quarter as the low introductory rates on its accounts, generally 5.9 percent, increased to almost 15 percent. But Advanta found that too many of its customers simply moved their balances to other cards as soon as the rate increased.

So the company did not have as much income as it would have liked to cover the surging losses, nor did it employ enough bill collectors to pursue delinquent accounts.

While Advanta focused on generic cards with low teaser rates, the competition moved to attract customers in other ways, forging links with organizations like alumni associations and creating tie-ins with airline frequent flier accounts.

Debt as lifestyle

The shakeout in credit cards has been going on for years. Two years ago, several regional banks, such as Mellon Bank Corp. and Mercantile Bancorporation, had unexpected losses from their card operations. Now even leading lenders, including Dean Witter, Discover, Banc One and First Chicago NBD are experiencing escalating losses.

The Administrative Office of the U.S. Courts said that a record 1.125-million households filed for personal bankruptcy last year. "This is not a typical economic cycle," said Tanya S. Azarchs, a bank analyst with Standard & Poor's Corp. "We are in a good economy, but consumers have become over-leveraged."

As a result of its losses, Advanta said last Monday that it expected to lose $20-million in the first quarter, in contrast to a profit of $41-million in the 1996 quarter. It said it expected to be profitable in the second quarter. The shares of Advanta fell $8.50 each, to $31.875, in Nasdaq trading. By Friday's close, the stock price was at $28.12{.

The company, based in Spring House, Pa., also said that David A. Brooks, a former Visa executive it had hired two months ago as its chief operating officer, had resigned. Several other top Advanta executives have left in recent months.

Advanta said it had hired BT Woflensohn, a division of Bankers Trust New York Corp., to look at "strategic alternatives" for the company. These include a sale or merger, the sale of some divisions, or some sort of joint venture.

Analysts said it will be hard for Advanta to sell itself.

"With such a great amount of other assets for sale in the financial services industry, the price Advanta will get would not be to its liking," said Thomas Facciola, an analyst with Lehman Brothers.