Subprime business ethics

IN THE EARLY DAYS of credit cards, lenders didn't market to deadbeats with a history of paying their bills late or missing payments. But as late fees and interest charges became a prime source of revenue, credit card issuers no longer put a priority on being paid back - at least not quickly.

So it was only a matter of time before card issuers began jumping into a void left by the implosion of the subprime mortgage industry - which allowed people with blemished credit records to cash out equity in their homes by refinancing at high rates. As the Globe's Robert Gavin reported last week, direct-mail credit card offers to people with subprime credit ratings rose 41 percent this year. One issuer, HSBC, more than doubled the number of pitches to such customers.

The increases are not part of a broad trend toward aggressive marketing of credit cards to all Americans; in fact, the number of offers to those with the best credit dropped by 13 percent. Rather, the trend is the latest evolution of a business model in which the shortsightedness and precariousness of certain consumers have become major revenue centers.

In a modern economy, people need credit in one form or another. Credit card issuers maintain they are giving people with low credit scores the chance to repair their records by making payments steadily. The other possible result, of course, is that such offers only give subprime consumers more opportunities to get in trouble.

Many of those who plunge deep into debt do so because of circumstances beyond their control, such as illness, the death of a spouse, or the loss of a job. Easy credit at high interest rates might help these consumers buy what they need right now, but will deepen their financial troubles almost immediately.

Meanwhile, other consumers have no obvious excuse for spending well beyond their means. Sending unsolicited credit card offers to them is like handing out bottles of vodka to people checking out of rehab.

Lenders have clearly been emboldened by a 2005 law that made it harder for consumers to escape their debts by declaring bankruptcy. Implicit in the arguments for that law was a concern about "moral hazard" - the notion that insulating people from the consequences of bad decisions makes them less likely to make good decisions. But free-spending borrowers aren't the only ones subject to moral hazard. Having received greater protection from the main risk of overly aggressive lending - that bankrupt borrowers will never pay back what they owe - credit card issuers are concentrating their efforts on the least well equipped to use credit wisely.

The credit card industry strongly backed the 2005 rules. But while those rules were supposed to promote virtue among borrowers, card issuers are now doing all they can to undermine it.