Consumers who carried a big balance and made the bare minimum payment each month used to be a credit-card issuer's dream. Now, they are their worst nightmare.

With defaults on the rise, credit-card issuers are employing all sorts of tactics to persuade consumers to reduce their balances and, ideally, close their accounts. Some issuers are using carrots: American Express is offering some cardholders a $300 gift certificate if they zero out their balance by April 30, and Citibank is offering to match a portion of the payments some cardholders make beyond the minimum amount due. Others are using sticks: Chase is tacking on a $10 monthly fee to the accounts of consumers who have carried a large balance for more than two years.

Reducing the liability of outstanding balances is an effective way to head off problems at a time when defaults are rising and it's become increasingly difficult to collect, says Tom LaMagna, director of Auriemma Consulting Group, a Westbury, N.Y.-based consulting firm that specializes in payments and lending. Credit card charge-offs (when issuers write off unpaid debts and send them to collections) rose to 6.3% during the fourth quarter of 2008, up from 4.15% the year before, according to the Federal Reserve.

At first, credit-card issuers targeted cardholders who hadn't used their accounts in a year or two. Now, they're going after another group: consumers who carry high balances and make few new purchases, many of whom have low rates from longstanding promotional balance transfer offers.

"When the economy was really booming, we were seeing a lot of 0%, low-rates-for-life offers because the industry was profitable overall," explains LaMagna. "Now they can't afford to keep them on the books, as good as that customer may be."

If you're an American Express or Citibank customer, don't sit around waiting for the card issuers to come knocking on your door with an offer of a gift certificate or cash aid to help you pay off your balance. Both card companies say their deals are by invitation only.

American Express sent out its offer to "a relatively small number of cardmembers who have sizable balances and little spending and payment activity," says spokeswoman Molly Faust. (She declined to specify how many.) Eligible consumers received a special offer code that, when redeemed online by Feb. 28, immediately cancels their account and sets the offer clock in motion. Fail to pay off the balance in full by April 30 and you'll be out on both the account and the gift card. (The remaining balance must be paid off under your regular card rate and minimum monthly payment.)

Citibank spokesman Sam Wang declined to comment on the issuer's program, saying eligibility and details depend on the customer's unique circumstances. But cardholder Lynn Murphy, of North Little Rock, Ark., was happy to tell us about the deal she received last week: 10% back on payments made above the minimum for four months, with a maximum rebate of $550. "I was surprised that they just offered it," says Murphy, who is considering the offer although she worries that it will limit her ability to manage debt during the offer period. While participating in the program, she can't make any purchases on her card. After she completes the program, her account's $17,750 limit will be cut to just above the balance.

A credit score of more than 800 wasn't enough to save Lee Frizzell of Farmington Hills, Mich., from Chase's new policy, which took effect in January. Chase is tacking on a $10 monthly service charge to many low-rate accounts with big debts held for more than two years. The fee is added to the balance, where it earns interest just like any other charge. Chase also raised the minimum monthly payment from 2% of the balance to 5% for affected cardholders. Frizzell has $12,000 in debt on his $35,000-limit card from three years ago, when he consolidated his bills to take advantage of an offer promising a rate of 3.99% for the life of the balance. "It was the cheapest rate around," he says. "Now they're trying to renege on the deal." (Changes affect fewer than 0.5% of accounts, says Chase spokeswoman Stephanie Jacobson.)
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