No one was more surprised than Thomas Carpenito with the credit-card invitation that landed in his mailbox earlier this
The 27-year-old deli owner from White Plains, N.Y., had about $10,000 in old debts and a credit rating 200 points below
“good.” He recalled thinking the post office had delivered the letter to the wrong house.
Far from a mistake, the offer was part of a controversial and growing partnership between debt collectors and banks that
profits both. To get the new credit card, Mr. Carpenito agreed to repay $400 on a seven-year-old debt that had expired
under New York’s statute of limitations.
“It was totally worth it,” he said. Having no credit cards made Mr. Carpenito feel “like dirt,” he said, especially when out on
dates. His new credit card, stamped with the MasterCard Inc. logo, was offered by Jefferson Capital Systems LLC, the debtcollection arm of CompuCredit Holdings Corp., in Atlanta.
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CompuCredit, a leader in the business, collected about $15 million in newly resurrected debts and fees by issuing credit
cards to people with banged-up credit in the first nine months of this year, according to a securities filing. It also has drawn
scrutiny by federal authorities for allegedly deceptive practices.
Many U.S. banks, hungry for new revenue streams, are eager partners. They receive fees and higher-than-average interest
rates by granting debt collectors access to their license with MasterCard. The debt companies typically agree to cover losses
to banks if borrowers stop paying.
Some lenders say borrowers have a moral obligation to pay their debts even if they are no longer legally responsible. Others
are leery about subprime borrowers. But the debt-driven credit cards show some banks tiptoeing back into subprime
lending after suffering big losses during the financial crisis.
Collectors aren’t afraid of the risks in issuing new credit cards because they instantly turn a profit on virtually worthless
debts²purchased for pennies on the dollar²when people agree to start making payments on them. The credit-card
agreements essentially create assets out of thin air.
The cards, born a decade ago, are gaining new momentum as debt-collection firms look for new ways to collect, said
William Weinstein, chief executive of Weinstein & Riley, a Seattle debt collector.
No one knows how many of these credit cards, usually stamped with the MasterCard logo, are in people’s wallets.
MasterCard declined to comment.
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Genesis Financial Solutions, of Beaverton, Ore., said it was opening about 100,000 new accounts a year in its “Balance
Transfer Program.” Unlike typical balance-transfer offers, where consumers are lured with low interest rates to move credit
balances, Genesis borrowers move expired debts onto the new card.