credit cards

Chase: You = Zero profit

Wednesday, Feb. 24
Posted: 2 p.m.

In a sign of the times, Bankrate reader Ben Burke says that last month Chase Bank denied his wife a new Chase BP Visa credit card because it determined that her account wouldn't be profitable. The letter the couple received explains that: "This decision is not a reflection on your creditworthiness but rather the need to open accounts that will be profitable."

It then gives the reason for the rejection: "Anticipated account related expenses likely to exceed expected revenue."

As a result of reviewing relevant information, including your current use of credit, we regret that we are unable to approve your request for a credit card account at this time. We have determined that the projected costs of maintaining this account would exceed anticipated earnings. This decision is not a reflection on your creditworthiness but rather the need to open accounts that will be profitable. The reasons for our decision are as follows:
Anticipated account related expenses likely to exceed expected revenue

The letter makes a reference to her "current use of credit," but Burke believes this doesn't mean low credit card usage. "My wife and I charge approximately $2,000 or more each month," he writes. "I believe Chase was referring to the fact that we pay the cards in full each month."

Burke was able to get the account opened after complaining to Chase and threatening to write to Congress, but the fact remains: His wife's application was originally rejected because the bank determined she wasn't profitable enough.

In other words, you can have a great credit score, means to repay the debt and still you might not be able to open an account -- because you aren't a desirable customer. (In the industry, people who don't revolve balances, who only earn the card issuers transaction fees, are called "Freeloaders.")

Welcome to the new era of credit cards.

To put Chase's move into context, round two of the Credit Card Accountability, Responsibility and Disclosure Act took effect on Feb. 22 and is changing the way many banks profit from accounts.

For one, issuers can no longer raise the rate on an existing balance due to a change in credit risk. "If you can't deal with your pricing on an ongoing basis, you have to deal with it on the front end and it may mean more fees and higher interest rates," Kenneth Clayton, senior vice president and general counsel for card policy at the American Bankers Association, said in a conference call last week. He also noted this restriction could result in less access to credit.

Already, annual fees have cropped up on 35 percent of credit card offers in the fourth quarter of 2009, and this spring Citi will put $60 annual fees on little-used accounts that don't spend $2,400 annually.

Previously, issuers could also apply payments as they saw fit when the cardholder had multiple debts on the account, say from a balance transfer and new purchases. As of Monday, however, issuers must apply payments over the minimum to the balance with the highest interest rate first, then to the balance with the next highest APR, and so on until the payment is exhausted. Recent research from credit scoring firm FICO found that this one rule in the CARD Act could cause a decrease of more than 50 percent in the profitability of banks' previously most profitable accounts.

So, while Chase's decision is shocking on the surface, in the context of the experimental phase issuers are in, it isn't surprising.

Take a lesson from Burke: If your account is denied due to projected unprofitability, call and complain. Provide specific reasons why you would make a good customer, such as regular use of the card and a perfect payment history on other accounts. When that fails, shop around. There are still plenty of cards out there.

A call to Chase Card Services was not immediately returned.

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