Credit card rules that come into effect on Monday will squeeze subprime borrowers' access to credit, analysts say, which could give a lift to the shadow banking sector and payday lenders.

This second round of provisions from legislation known as the CARD act, signed into law in May, will significantly affect how card issuers earn money by restricting their ability to charge fees and raise rates, especially on existing balances.

That means major card companies such as Visa Inc and MasterCard Inc will increasingly focus on borrowers with clean payment histories, as they become less willing to bet on returns from risky borrowers. The refocusing could further drive people with spotty credit histories into the open arms of payday lenders -- which charge interest rates that can reach 400 percent on an annualized basis for short-term loans.

Where does that segment (of borrowers) go for credit now? If they're using cards to manage cash flow from paycheck to paycheck, who steps in to meet that need? That could be the payday lenders, said Scott Valentin, analyst at FBR Capital Markets.

Payday lending companies such as Cash America International Inc and Advance America Cash Advance Centers Inc are increasingly filling a gap for middle- and low-income borrowers seeking an alternative to credit cards but not yet willing to pawn their family heirlooms.

Their earnings reflect the trend. Fort Worth, Texas-based Cash America last month reported that fourth-quarter profit more than doubled to $33.7 million, after it wrote more cash advance loans and had a higher balance of pawn loans outstanding. Advance America on Wednesday said its fourth-quarter profit more than tripled to $19.8 million, helped by its growing prepaid cards and online cash advance businesses.

They say they are attracting more customers that previously had relied on credit cards or bank lines.

Over the last year or so we have definitely seen our customer demographics support the notion that a broader range of Americans are choosing the payday advance option, Jamie Fulmer, director of public affairs for Advance America in Spartanburg, South Carolina said.

Customers' average income has increased to about $50,000 from $41,000, and a significant portion of customers have a median household income over $75,000, he said.


Payday loans are short-term loans, typically over a two-week term and involve balances generally in the $300 to $500 range. The industry originates an estimated $27 billion in annual loan income, according to the Center for Responsible Lending.

Bank regulators and consumer advocates have repeatedly warned about the traps of payday lending, namely extremely high interest rates and fees.

States have cobbled together restrictions on the industry, but nationwide legislation that aggressively clamps down on these rates has failed to materialize.

To be sure, payday loan companies have, like the credit card companies, suffered loan losses as U.S. unemployment levels hover close to 10 percent. They are also facing regulatory changes as states have curbed short-term lending.

A further increase in short-term lending from payday loan companies as a direct result of card regulation changes is likely to take time.

People aren't going to jump off the credit card bus and go and get a small loan, said Henry Coffey, analyst at Sterne Agee. Using a credit card to pay for supermarket shopping, for example, is a very different experience to standing in line to cash a pay check at a shop on Main Street.

But many subprime borrowers may not have another choice.

Kenneth Clayton, vice president and general counsel for the American Bankers Association, said the new rules restrict major card companies' ability to charge based on customers' changing risk profile.

Inevitably, the big-name card companies will not extend as much credit to risky borrowers.

There's always going to be an incentive for non-mainstream providers of credit, Clayton said.

(Reporting by Elinor Comlay and Karey Wutkowski, editing by Gerald E. McCormick)