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Credit Card Ghosts Haunt GE and MasterCard

Two titans of plastic are being bit on the backside by charge cards of yesteryear.

MasterCard logoFirst, MasterCard Worldwide agreed yesterday to pay $1.8 to rival American Express. The cash is part of a settlement of claims that Mastercard (along with Visa, which agreed to a $2.1 billion payment seven months back) tried to monopolize the charge card business, or at least make it harder for rivals to get in.

Meanwhile, the Wall Street Journal reports that General Electric is having trouble unloading its store-based credit card outfit, a business engaged in servicing charge cards issued by the likes of Wal-Mart, Lowe's and Brooks Brothers. The reason: Possible buyers -- banks already in the credit card biz -- fear rising delinquencies and charge-offs.

The two stories are tied together by the boom in the number of cards issued in the late '90s and since then. At that time, Visa and MasterCard imposed rules on their member banks, which restricted the banks' abilities to issue cards served by rival networks such as Amex and Discover Financial Services. After a Justice Department lawsuit nixed the restrictive rules, Amex and Discover were able to cut more deals with banks. The result is the number of credit cards issues boomed -- which in turn accelerated the proliferation of credit card debt, the number of delinquent payments and the volume of personal bankruptcies.

With banks issuing plastic like candy, it raises the question of who needs a store-based credit card. The answer, of course, is no one. But stores issue them as part of a come-on to retail customers -- typically along with a discount on a particular purchase. (The business GE is trying to unload services the cards issued by stores.) The cards are, therefore, attractive to consumers with marginal abilities to pay.

Not surprisingly, the non-payment rate on these cards is rising faster even than the rate on regular Visa (or Amex or Discover) cards. This being the case, possible buyers of GE's business are thinking twice or walking away.

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