Card Issuers Lure Debt Using Carrots, Sticks ...[ ... But Crack Down on Delinquency]

CREDIT-CARD companies love a debtor, and many issuers are pushing harder to get card holders to carry a balance.

With few consumers left who are good candidates for more plastic, and companies under pressure to maintain record-high profits, card issuers are trying new incentives to boost borrowing.

''It's all been building for the last couple of years,'' says Robert McKinley, president of RAM Research Group, a bank-card research firm in Frederick, Md.

Strategies vary widely. Rebate programs, for example, that give bigger rewards to those who carry balances have been around for a while. But more recently, some card issuers have been charging annual fees to those who pay off their balances in full, reducing or nixing grace periods, or flat-out canceling cards if customers don't use them enough.

First USA Bank, for example, last year told some customers who seldom used their cards that it would cancel their accounts if they didn't start charging more.

''Somehow, you're a deadbeat if you don't carry a balance,'' says Howard Strong, head of Credit Card Users of America, a consumer group in Beverly Hills, Calif. He predicts card issuers will back off on pre-approved new-card offers to people who don't carry balances on current cards.

Several of the major credit-card issuers say they have no broad strategy of offering incentives, but review accounts on an individual basis.

''I don't think it's the intent of any bank-card company to lure people into debt that they can't handle,'' says Nancy Judy, spokeswoman for the American Bankers Association (ABA) in Washington.

While they may not want people to take on debt they can't handle, the more people charge, the more money the issuers make.

It's no secret that those who carry a balance bring in big bucks for the industry. Interest accounts for 78 percent of card issuers' total revenues. It far outweighs merchants fees (11 percent of revenues) and annual fees (5 percent), according to the ABA.

Administrative costs per credit-card account generally run between $16 and $22, Mr. McKinley says. So if a customer charges only $1,000 a year and doesn't carry a balance, the card issuer earns only about $9 a year in revenue from merchant fees. If you charge less than $2,000 a year, he says, card issuers generally consider you a ''lost account.''

Hence the incentives to ''revolve'' - industry jargon for carrying a balance.

The newest among the rebate cards: American Express and Delta Air Lines launched a new card last month that lets users earn one mile on Delta for every dollar charged. Card holders who carry a balance will get an additional 0.2 miles for each dollar spent.

Cathy Cummings, spokeswoman for American Express, says she doubts the offer will change consumer behavior in any ''significant way.'' ''Our consumers are smart,'' she says, ''and if they are not inclined to carry a balance, they would not carry a balance for 0.2 SkyMiles.''

But industry groups say consumers do respond to promotions indirectly.

''You don't think you're going to 'revolve' your cheerios. But you see those miles and you think, 'Well, I'm spending a grand a month on groceries, why not get half an airline ticket a year,' '' McKinley says. ''It's a subliminal message that everyone's saying, 'You will carry a balance if we throw you some incentives,' '' he adds.

Lower teaser rates are also a factor. ''You throw someone a 6 percent interest rate ... and they don't have a problem running their balance up a little higher than they normally would,'' McKinley says.

Despite all the incentives, the percentage of card holders who carry a balance has been falling. The current figure is 70 percent, down about a percentage point a year since 1989.

Still, those who revolve are carrying a bigger balance each year. The average balance per card: $1,938. Total charge volume has grown about 25 percent a year for the past two years, topping more than $700 billion, McKinley says.

Driving the record usage: Plastic can be used in more places than ever before. Consumers can use cards to pay for groceries, utilities, and college tuition.

And the 30 percent of card holders who don't carry a balance aren't total ''deadbeats,'' as the industry calls them. They represent about half of the total charge volume, McKinley says.

''The market has really changed in the last several years, dramatically and permanently,'' says Ruth Susswein, executive director of Bankcard Holders of America, a consumer group in Salem, Va.

In the past, she says, credit-card companies didn't need to encourage this kind of behavior. Until five years ago, competition was practically nonexistent. Most card issuers offered a 21 percent annual percentage rate, and annual fees were standard. In 1990 and 1991, nonbank issuers started to enter the market, stealing away millions of customers.

And the marketing changed. Card issuers started encouraging customers to spend more on their cards, Ms. Susswein says, and to use them in new ways.

The next level, she says, was to encourage people to incur debt on their cards ''because that's where [credit-card companies] make their money.''