STRINGS ATTACHED

By John Greenwald

Been bombarded by any new credit-card offers lately? Millions of preapproved applications land in U.S. mailboxes every day. But now, mixed in with come-ons for frequent-flyer miles and cards that sport a picture of your dog, sterner messages are being delivered by many issuers. Faced with soaring delinquencies and smarter consumers in a glutted $700 billion marketplace, lenders are suddenly jacking up interest rates, slapping on new fees and pulling back benefits. In September, GE Capital, the finance arm of General Electric, warned holders of its GE Rewards MasterCard to expect a $25 annual penalty unless they racked up some interest-bearing debt. Two weeks later General Motors chopped in half the discounts that holders of its gold cards can get when purchasing new GM cars and trucks.

These crosscurrents reflect a particularly stormy period in America's love affair with charge cards. With more than 1.1 billion pieces of plastic already crowding consumers' wallets (the typical user carries six or seven different cards), the 7,000 banks and companies that issue all this credit are struggling to protect their profits and gain whatever edge they can. For some this has meant flashy new offerings like the $100,000 (as in credit line) Platinum Plus card that M.B.N.A. America Bank of Wilmington, Delaware, launched earlier this year. (Just tell that Rolls-Royce dealer to put it on the card.) For others, like GM, it has meant cutting back enticements that proved too expensive to maintain. For still others, like Apple Computer, which lured spenders with discounts on computers, it has become time to get out: the troubled company told holders of its Apple Citibank card last week that it was quitting the credit business to focus on computers.

This shake-up creates both challenges and chances for cardholders--and that means virtually all of us. Consumers like Sue Ruopp, 30, a homemaker in Crestline, California, refuse to pay irksome new fees or higher interest rates. "I have no loyalty," Ruopp says, with words that would bring pain to any marketer's ears. "I will go with whoever has the best deal." She did just that by transferring her $4,000 balance from a Bank of America Visa card that charged 18.9% interest to a Capital One Visa account that carried a 9.9% rate--potentially saving more than $300 annually. Close scrutiny of new offers can also pay off. Last week Aaron Levin, who owns an independent long-distance company in Castle Rock, Colorado, tore up an application for a $25,000 line of credit with no annual fee when he saw that he would incur an immediate finance charge each time he used the card. "It's frankly a rip-off," Levin says. "It's packaged for someone who needs to make a big purchase and doesn't know where else to find the money."

Other consumers have developed the art of "card surfing" to cash in on the constant battle for market share. Brad Andres, 27, a New York City investment banker, reckons he has saved some $2,500 in interest charges by switching accounts four times in the past three years as attractive new cards have come out. Andres has also used the threat of defection to persuade card issuers to lower his interest rate and waive his annual fee. Says he: "All you have to do is point out that there are better offers out there and renegotiate."

Banks in particular are willing to deal because credit cards, even those with "low" interest rates, remain the most profitable assets in their portfolios. The math is relatively simple: banks borrow money from the government at 5%; the average card carries a 17.54% annual charge. The difference between the two is called the spread, for obvious reasons. In addition, card issuers typically charge merchants some 2% to 3% of the amount of each purchase that a customer makes. Throw in late fees, or in GE's case early fees, and margins might be enhanced further. "Banks earn more from credit cards than from any other business, even with all the delinquencies and losses," says Ruth Susswein, executive director of Bankcard Holders of America, a Virginia-based consumer group. "Even if you pay no annual fee, they still make money off merchants."

To remain profitable, however, lenders want cardholders to pile up big debts. Consumers who pay off their balances each month are known in the industry's distorted parlance as "deadbeats" because they avoid steep interest charges. GE, which offers its Reward cardholders cash rebates worth as much as 2% of their purchases, put the deadbeats on notice last month with its $25 prompt-payment fee. "If there is not a tremendous consumer backlash," says Susswein, "we will see more companies punish cardholders for paying in full."

Prompt payers have also bedeviled AT&T's Universal Card subsidiary and helped spur the recent resignation of David Hunt as president of the unit. Analysts say roughly 60% of the Universal Card's 18.3 million accounts were held by convenience users who took advantage of free lifetime memberships and other benefits while paying their bills in full each month. Industrywide, only 36% of cardholders pay off their balances each month. Although AT&T officials say they have no plans to dock card users for paying up, the company is pondering other ways to persuade the holders to take on more debt.

Such problems notwithstanding, countless credit-card wannabes continue to crowd into the field. Next week Wal-Mart and Chase Manhattan Bank will roll out a no-frills MasterCard with no annual fee and an annual interest rate of 14.48%. "We found that people really don't care that much about special promotions," says Keith Morris, a spokesman for the largest U.S. retailer. "They want a card with a fixed low-interest rate that won't go up after 60 or 90 days." But Wal-Mart is baiting its hook with a 9.9% teaser rate to encourage holders of other cards to switch. In the war for buy-now-pay-later customers, the battles never end.

--Reported by Tammerlin Drummond/Miami, Marc Hequet/Minneapolis and Stacy Perman/New York

With reporting by TAMMERLIN DRUMMOND/MIAMI, MARC HEQUET/ MINNEAPOLIS AND STACY PERMAN/NEW YORK