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Low income, high profits

And Cormier did not get that card by accident. Since the 1990s, credit card vendors have aggressively courted customers among lower-income, higher-risk consumers. It is the industry equivalent of tobacco companies marketing to minors.

In 2005 alone, credit card issuers blanketed the country with 6 billion offers for new credit cards, with most of those aimed at people of modest means and modest credit ratings - people most likely to carry balances at high interest rates that generate enormous profits for banks.

With profits so high, card issuers consider it an acceptable cost of business that about 5 percent of those customers, unable to keep up with minimum payments, will tumble into default.

''The higher-risk customers are actually more profitable, especially if you can get them to pay,'' said Matthew S. Melius, the former chief of operations at Metris Cos., the former parent company of Direct Merchant Credit Card Bank.

But, speaking at a debt collection conference in Orlando last year, Melius said pushing credit on higher-risk customers can backfire. The granting of credit, he said, is ''a drug, if you will. ..... If we give it to them, they're going to use it.''

He laid the blame for the practice at the industry's doorstep.

Furthermore, boosting interest rates to 30 percent or more and slapping those who make late payments with hefty penalties is ''probably the worst thing you can do to a customer who is struggling,'' he said.

It is the explosion of credit card availability, combined with the need of companies like Metris to swiftly off-load customers who fall into delinquency, that has fueled the astonishing growth of the debt buying business. Since 1995, bank credit card issuers have sold off $390 billion in past due debt. The annual sales have grown from $4.4 billion in 1995 to $66.4 billion in 2005.

Debt buyers - many of whom also collect debt - work in different ways. The largest purchase huge portfolios of debt written off the books by major credit card companies. They

A debt collector at work in Cambece Law Office in Peabody. With millions of Americans months behind on credit bills, the collection business is booming. (Globe Staff Photo / Michele McDonald)

then break up the debt into smaller blocks for resale. Companies that buy this debt first try to collect the money, then re-sell uncollectible accounts to others further down the collection food chain.

Evidence of the untrammeled nationwide growth of the business is hard to mistake. Recent press releases tout the expanding fortunes of debt collectors across the country: a new 21,000-square-foot facility in Chicago for collectors to make calls demanding payment; 300 new positions in Mobile, Ala.; official congratulations from New York Governor George E. Pataki for the creation of 450 jobs for debt collectors in Batavia, N.Y.

On Wall Street, debt-buying firms have become coveted investment targets. One publicly traded company in Norfolk, Va., Portfolio Recovery Associates Inc., collected $10.9 million from debtors as recently as 1998. Last year, it took in $191.4 million - annual revenue growth of 55 percent. Portfolio Recovery's profits, which were $402,000 in 1998, soared to $36.8 million in 2005.

The firm's results also illustrate how the industry turns pennies into millions.

In its first decade of operation, Portfolio Recovery purchased 658 debt portfolios with a face value of $16.4 billion - at a cost of only $415.4 million. That's about 2.5 cents for each dollar of debt purchased. It collects, on average, 7.5 cents per dollar.

Printer friendly | E-mail to a friend | Other Special Reports
  Pages: [1]  [2]  [3]  [4]  [5]  | [Part One]  [Part Two]  [Part Three] | Series homepage