Advanta's credit shutdown endangers cardholders

Update: Advanta is expected to shut down its credit card accounts -- meaning cardholders will no longer be able to use them -- on May 30. It had previously announced the accounts would be shut down on June 10. Published reports indicate that Advanta informed customers via e-mail.

As many as 1 million credit cardholders could be forced to search to find a new issuer, and debt holders could be faced with APRs as high as 35 percent, when small business card issuer Advanta Corp officially shuts down its credit card accounts for future transaction activities on June 10.

Advanta announced the shutdown May 11, attributing the move to the lack of immediate funds available in its receivables account to compensate investors. Advanta funds receivables through a trust that is supported by investors who buy up shares in exchange for paid interest. However, as Advanta -- along with most of the credit market -- has seen rising delinquencies, there has been less money to pay bondholders. Putting credit cards on hold will attempt to limit losses and prevent significant erosion of its capital as Advanta struggles to fund its customers' purchases and repay investors.

Advanta's uncollectible debt reached 20 percent on March 31, according to its filings on May 11. The company attributed its losses to suffering profits as the unemployment rate soars and customers are unable to repay debt.

The suspension of Advanta's credit card accounts is the latest hit Advanta has taken in a two-year market decline. The company's stock -- which was traded at almost $30 per share in July 2007 -- plummeted to 32 cents this year over credit market fears, and has since only climbed to $1.55. Advanta customers were angered when their rates were hiked up as high as 30 percent last fall, and on April 30 the issuer announced it incurred a $76 million first-quarter loss due to investments receivables and severance payments.

Advanta Chief Financial Officer Philip Browne said that while cardholders accounts will be shut down for transaction purposes, they will still maintain accounts with the company and be obligated to pay off balances. "We'll be shutting down accounts for future transaction activities, but many of the customers will maintain balances and pay us off over time," Browne said in an interview with Bloomberg."We'll have to service and collect on that, and that will be the first order of business for the company."


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Updated: 01-22-2019