The Wall Street Journal-20080205-Credit Cards Are Playing Harder to Get- Amid Rising Delinquencies- Banks Get Pickier- Raise Fees- Direct-Mail Pitches Decline

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Credit Cards Are Playing Harder to Get; Amid Rising Delinquencies, Banks Get Pickier, Raise Fees; Direct-Mail Pitches Decline

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The credit crunch is starting to hit consumers where it hurts -- in their wallets.

As lenders tighten credit standards, many consumers have faced greater difficulty getting a mortgage or a home-equity loan or line of credit. Now, some are beginning to feel the squeeze on their credit cards -- despite the dramatic cuts the Federal Reserve recently made in its benchmark Fed funds rate, including last week's half-percentage point cut to 3%.

Big card issuers such as Citigroup Inc. are requiring higher credit scores before issuing new cards, particularly in states that have been hit hard by the housing downturn, including California, Arizona and Florida. Some lenders, including Bank of America Corp., are offering lower initial credit lines. Other lenders, such as Capital One Financial Corp., are limiting credit-line increases or reducing credit lines for existing customers if they see signs that they are suddenly applying for more credit or are having trouble paying down their balances. And many card issuers are raising late fees and other charges to help offset what they see as higher risk.

The stricter lending standards come as many banks recently reported earnings and disclosed surprisingly large losses from their consumer businesses. Among the problems: higher credit-card delinquencies and losses. The banks expect the problems to get worse as the economy slows.

A new survey of senior bank-lending officers, released yesterday by the Federal Reserve, found that of 41 banks, four, or 10%, said they have tightened standards for approving credit-card applications from individuals in the past three months. That's up from 5% in a survey conducted in October.

Enrique Colon, a 35-year-old recruiting manager in Fredericksburg, Va., says he got a letter from American Express Co. last month notifying him that it had canceled a payment feature on his One from American Express card that allowed him to carry a balance from month to month. The letter cited factors such as credit delinquencies and recent credit inquiries for the change, which now requires him to pay off any balance in full every month, he says. According to Mr. Colon, most of the reasons cited weren't valid: He hasn't recently applied for new credit and has never been late in his payments with American Express, he says.

While an American Express spokeswoman says the company couldn't comment on a specific individual's case, she says in a select number of cases, revoking a customer's ability to carry a balance could be an action that it might take based on that customer's "risk factors."

Posters on CreditBoards.com, a popular online credit forum, are reporting that they need higher credit scores to get approved for credit cards, says Linda Pack, one of the site's founders. What's more, users are saying that when they do apply for credit, card issuers are being more careful by pulling credit reports from multiple credit bureaus instead of relying on one report.

Fewer applicants are being issued new cards: On average, credit-card approval rates have dropped to 32% of applicants from 40% a year ago, according to Robert Hammer, chief executive of R.K. Hammer, a bank- card advisory firm. This comes as issuers are doing fewer direct-mail solicitations to new customers. The number of such mailings fell about 16% to about 650 million at the end of November from about 778 million in January 2007, estimates Mintel Comperemedia, a market-research firm.

Instead, several banks are more aggressively pitching cards to their existing customers, dangling perks such as bonus reward points if a cardholder also has a deposit account at the bank.

Washington Mutual Inc., for example, opened 31% fewer new credit- card accounts in the fourth quarter of last year than in the third quarter, as it pulled back on direct marketing to focus on credit-card sales to banking customers with better credit.

Card issuers also are raising fees in anticipation of increased delinquencies as the economy slows. Industry-wide penalty fees rose to $18.1 billion last year from $17.1 billion a year earlier, says Mr. Hammer, who expects total fees could go up another 6% this year. The average late fee, currently $39, could exceed $40 this year, he says.

American Express, which raised its late fees last year, plans in May to change the minimum payments calculation across its consumer credit cards, which is likely to increase the minimum amounts due for some cardholders. Other card issuers, such as Bank of America, Citibank and J.P. Morgan Chase & Co. unit Chase Card Services, are imposing higher fees to transfer large balances between cards.

Citing the risks of a consumer-led recession and the outlook for higher credit losses, UBS AG downgraded the stocks of several credit- card issuers -- Discover Financial Services, American Express and Capital One -- to a "sell" rating yesterday.

Consumers who expect to apply for a new card should take a fresh look at their credit scores and make sure that the information in their credit reports is accurate. You can order a free annual report from each of the three major credit-reporting bureaus -- Experian Group Ltd., TransUnion LLC and Equifax Inc. -- online at AnnualCreditReport.com, or by calling 877-322-8228. If you stagger your requests for free reports throughout the year, you'll be reviewing one of your reports every four months.

To avoid dinging your score, you should pay your bills on time and aim to use less than 20% or 30% of your available credit. It's also a good idea to limit your applications for new credit cards.

One strategy: Maintain several credit cards with high credit limits -- $10,000 to $20,000 or more per card is optimal -- so that if an issuer raises fees or changes the terms, you have some flexibility and don't have to continue using those cards and can transfer your balances to another lower-rate card, says John Ulzheimer, president of consumer education for Credit.com, a financial-services Web site.

Having cards with high limits can also help protect your credit score if the issuer cuts your available credit since it won't look as if you are suddenly maxing out on your credit, he says.