Shaky retailer partners are posing a new problem for card issuers.

Latest case in point: the liquidation of Circuit City Stores Inc.

The electronics chain filed for bankruptcy protection in November and is now on its way out of business. As a result, hundreds of thousands of private-label cards that JPMorgan Chase & Co. services will become useless to their holders once all 567 U.S. stores have closed.

The banking company said last week that it plans to convert some of the accounts to general-purpose cards. It would not say how many would be switched or how many it intends to close.

Observers said such conversions can help stem an issuer's losses. "When a retailer goes out of business, the loss rates go up because the customers no longer have utility and those people who are on the edge" have less incentive to make payments, said Steven Jacowitz, a former credit executive at Saks Fifth Avenue, Bloomingdale's, and Filene's and now the director of alliance development at Auriemma Consulting Group Inc.

For stretched consumers, a card that can only be used at a bankrupt retailer "really comes down to the bottom of the list of which account is going to get paid first," Mr. Jacowitz said. An issuer must "be more aggressive on the collections side" for the accounts not deemed worth converting.

Paul Hartwick, a spokesman for JPMorgan Chase, said the banking company "will continue to service and support our cardholders … , and we plan to convert accounts," though "we've not yet finalized the plans."

The former Bank One Corp. bought the Circuit City credit card portfolio in 2004, the same year it sold itself to JPMorgan Chase. At the time, the portfolio had $1.8 billion of receivables and 1.5 million customers. This included both private-label cards, which could only be used in Circuit City stores; and cobranded general-purpose cards, which could be used anywhere Visa was accepted and offered rewards for shopping at Circuit City. JPMorgan Chase would not say how big the portfolio is today.

Leigh Allen, a consultant at Global Consumer Finance Advisory LLC in New York, said that even people with cobranded cards are more likely to behave as private-label cardholders do when the card is from a specialty retailer like Circuit City. Such customers get the cards "to buy flat-screen TVs and not really [to] use them outside" the store, said Mr. Allen, a former Citigroup Inc. investment banker who advised banks on private-label acquisitions.

Consumer spending has nose-dived amid rising unemployment. JPMorgan Chase, which bought a stake in Target Corp.'s receivables last year, has also been exposed to that retailer's mounting chargeoffs. The two leading issuers of private-label cards — General Electric Co. and Citi — have tried to get out of the business by putting their store-card units up for sale. But "Chase remains committed to the private-label business," said Mr. Hartwick, the JPMorgan Chase spokesman.

Mr. Allen said that, from an issuer's point of view, if a retailer partner is in trouble, "you don't want to get too aggressive" about tightening guidelines "because some of the things you do can affect their sales and can affect whether they go out of business."

In September, Bruce Besanko, Circuit City's chief financial officer, said on a conference call: "In terms of activity with Chase, they continue to approve the FICO rates and bands as they have been, and they've remained relatively constant over time."

But Mr. Hartwick said last week that JPMorgan Chase had started tightening standards on the Circuit City portfolio "as leading indicators began to change in early 2007."

It raised the minimum credit score needed to qualify for a Circuit City card and increased "the number of applications that go through our internal judgmental review process" in which an analyst reviews the application and can call the customer for more detail.

"In taking those actions," he said, "we balanced safe and sound underwriting practices with our commitments to our partner."

Subscribe Now

Authoritative analysis and perspective for every segment of the payments industry

14-Day Free Trial

Authoritative analysis and perspective for every segment of the industry