Think the credit-card business has been forever crimped by the Credit Card Reform Act of 2009? Or, maybe you think it’s simply dead in the water because nobody wants, needs, or can get credit after 2008’s lingering debt debacle. This is what the credit card issuers would have had you believing a couple of years ago anyway, judging from their cries that the new law and stifled economy would ultimately shut their business down while simultaneously increasing credit costs for consumers.

The latter part was certainly true (in a sense), since most issuers cranked up interest rates right before the law went into effect. The former part, though, wasn’t quite accurate. The credit card business is literally more profitable then ever, and it’s poised to keep getting better. And while this may be bad news for consumers, it’s certainly good news for investors.

#-ad_banner-#Proof of the pudding
The credit-card business is so “tough” right now that MasterCard (NYSE: MA) just posted its best 12-month stretch ever. The $16.14 per-share it’s earned since this point a year ago makes 2007’s earnings — when the credit spigots were wide open — of $5.09 per share look like a joke.

And just to be clear, it hasn’t been through a litany of sneaky fees or nickel-and-dime charges that are driving record results. Last quarter’s 22% increase in revenue was sparked by a 17% increase in transactions, and international expansion.

In other words, MasterCard earned it.

MasterCard is hardly alone in its amazing success, though. Competitor Visa Inc. (NYSE: V) is also having no problem reaching record earnings levels. For the first three quarters of fiscal 2011, Visa’s top line is up from $2.58 billion to $3.15 billion — a 22% year-to-date improvement. And like MasterCard, Visa didn’t have to pull any unfair stunts to do it. Service revenue and data processing revenue are both up for the year so far, while incentives (to users) also increased on a year-to-date basis.

The list goes on… Discover Financial Services (NYSE: DFS) is on pace for its most profitable year ever. Capital One Financial (NYSE: COF) is within striking distance of its most profitable year ever as well. And considering how decisively it’s been beating earnings estimates since the middle of 2009 — anywhere from 10% to 40%, depending on the quarter — odds are pretty good it too will be at record-earnings levels soon.

At the heart of the matter
Contrary to conventional wisdom, consumers aren’t as shell-shocked to credit as they may have been just a few months ago. For 10 consecutive months now, consumer credit levels have grown on a month-to-month basis, after falling for 20 straight months.

Revolving credit (credit from credit cards) in the United States hasn’t grown every single month during that 10-month stretch, but even this downtrend has been holding steady at a level of $792 billion. And, for the past four months, it has swelled more than it has contracted.

Simultaneously, as of July, the number of 30-day credit card delinquencies has fallen for 21 consecutive months. The percentage of credit card accounts now one month behind on payments is only 3.1%, which is less than half of the delinquency rates seen in late 2009. The 60-day delinquencies have fallen pretty much hand-in-hand with the 30-day delinquencies, too. In fact, payments have become so reliable that ratings agency Moody’s expects July’s charge-off rate (the rate at which the credit card companies write off delinquent accounts as losses) of 6.1% to sink to less than 4% by the end of 2011.

Granted, total credit usage is down about 15% from 2008’s peak, and repayment rates are near record levels, thanks largely to (and here’s an irony) a depressed economy and high unemployment. It doesn’t change one clear reality, though — the credit card industry’s current customers are very profitable, because they’re very reliable.

Bottom line: Revolving credit levels are stabilizing, credit card companies are generating more transaction revenue, and charge-offs are falling. This “supposed” to be a point in time when credit should allegedly be a lousy business. But numbers don’t lie, which is why investors should be looking at the major credit card carriers as potential portfolio additions.

Risks to consider: While credit usage seems to be growing again despite economic turbulence, a truly severe renewal of the credit crisis or stifling legislation could put the brakes on the industry’s earnings growth. This is very unlikely to happen, however, considering how desperate the federal government is to keep consumer spending in motion.

Action to Take –> While MasterCard and Visa are comfortable possibilities because they’re familiar, they’re also both a little bloated at current valuations. The more effective picks right now are the integrated credit-provider names like Capital One and Discover Financial.

Of the two, Capital One looks like it’s packing more punch, yet doing so at a lower price. The trailing price-to-earnings (P/E) ratio for the stock is less than 6, and the forward- P/E is about 7. The degree to which it’s been topping earnings estimates is second-to-none in the industry. Between being about 30% undervalued at its current price in addition to being severely underestimated for so many quarters, Capital One may have 40% to 50% upside during the next 12 months, partially prodded by more upside earnings surprises.