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"Sub-prime" usually refers to consumers with credit scores below 560. "Sub-prime" includes consumers with little or no credit history, consumers who may have filed bankruptcy within the past 10 years, those who have a terrible track record over the past seven years of paying their bills on-time, or consumers currently carrying way too much debt for their income level.

The credit card industry began to target this group of consumers during the early 1990s, offering cards with either high interest rates or high fees, or both. In most cases, "sub-prime" VISA and MasterCards offer initial credit limits ranging from $100 to $500. The first year fees could run several hundred dollars and the interest rates could reach above 30%. Prior to 1990s, consumers with a blemished credit history or insufficient credit history had to come up with a few hundred dollars to secure a credit card. However, the new breed of "sub-prime" cards required little, if any, security deposit.

When the economy went sour last summer, sub-prime cardholders began to stop paying their credit card bills. Presumably many of the consumers were faced with reduced income. At mid-year 2002, some of the issuers of "sub-prime" cards were writing-off losses in the 15% to 17% range versus the average industry loss rate of 6.5%. Also, delinquency rates among sub-prime card issuers were averaging about 10% at mid-year while the rest of the industry averages about 5%.

As a result, the issuers specializing or dabbling in this market segment, have been burned badly. "Sub-prime" lending lead to the shut-down of NextCard and the unraveling of Providian. Metris/Direct Merchants Bank and Capital One have also been affected. This month, The Credit Store announced it was in big trouble and may have to cease operations. Over the past 12 months, Providian, the largest sub-prime issuer, watched its delinquencies grow from 8.04% to 10.16%, while its charge-offs, or losses, soared from 10.29% to 17.53%. These figures represent Providian's total portfolio, which also includes a very significant number of "prime" or "super-prime" accounts. Metris, also known as Direct Merchants Credit Card Bank, reported its mid-year 2002 delinquencies grew from 8.3% to 10.20%, and that its losses soared from 10.90% to 15.00% since last summer.

The collapse of the "sub-prime" credit card market has made government regulators increasingly concerned over the risky business practices of these issuers. This month, the Federal Financial Institutions Examination Council, the Office of the Comptroller of the Currency, the Board of Governors of the Federal System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision developed account management and loss allowance guidance for credit card lending. The draft guidance would apply to all institutions under the agenciess' supervision that offer credit card programs. It describes the agenciess' expectations for prudent risk management practices for credit card activities, particularly with regard to credit line management, over-limit accounts, and workouts. The draft guidance also addresses income recognition and loss allowance practices for credit card lending. The interagency guidance is expected to take effect on August 16.

Most of the issuers involved in sub-prime credit cards have pulled back their marketing. Most of the new cards now being offered to consumers with lousy credit are VISA and MasterCard debit cards, not credit cards. Consumers with no credit or credit problems will have to get cards the old fashioned way, e.g., a secured VISA or MasterCard.

Issuing bank credit cards to high-risk consumers has always been considered bottom fishing. But, snagging too many of these can bring an issuer to the bottom.

Hindsight is always 20-20!

                       BRAND  U.S. PERFORMANCE
      Network      1Q/01 VOL    1Q/02 VOL     CHNG      SHARE
      VISA           $204.6b      $225.0b     +10%      51.5%
      MASTERCARD     $109.6b      $133.1b     +21%     *30.5%
      AMEX           $ 55.6b      $ 54.3b     - 2%      12.4%
      DISCOVER       $ 24.4b      $ 24.1b     - 1%       5.5%
      TOTAL          $394.2b      $436.5b     +11%
*Based on data reported for 1Q/01; however, MasterCard's report shows 
                    an annual change of +16.75%
Source: CardData (www.carddata.com)