Woodward & Lothrop's 800,000 credit card holders recently received a mail offering that presented a seemingly simple choice: they could protect their credit cards for $12 a year or they could refuse.

But following that July mailing, Woodies said it received a number of calls from card holders complaining the notice left the impression that the response form had to be returned--with the card holders paying the postage--or they would lose their Woodies credit cards.

This mailing, which appeared to have been sent by Woodies, actually came from a leading credit card protection service, Safecard Services Inc., based in Fort Lauderdale, Fla. The mailing used Woodies' return address on the front and prominently displayed the store's name throughout the notice, while Safecard's copyright appeared only in tiny print in two places.

Also not advertised in the notice was Woodies' agreement with Safecard, which guaranteed the store a percentage of the money paid by every Woodies card holder who signed up for the service. Neither Woodies nor Safecard would disclosed the store's share.

Although Safecard says its standard procedure is to clear its mailings with the credit grantor, Woodies officials said this one was sent out without its knowledge.

After writing the notice, Safecard either inserts it in a monthly billing or mails it directly to the card holders, as in the Woodies case, using a company that specializes in volume mailings, said Safecard Vice President Agnetta Boye. The names and addresses are supplied by the card issuer.

In response to the complaints, Woodies sent a second notice to clarify its position, saying the service might prove valuable for some card holders and apologizing for any misunderstanding.

"We were as mad as our customers," said a store spokeswoman. "We have no problem with the service. We thought we were just offering our customers a service that may be useful. It was the format we had problems with."

The Woodies incident illustrates the controversy surrounding credit card protection services and, as more stores, banks and other card issuers promote the service, the controversy continues to grow. Credit grantors of all types are looking into these services as a way of boosting revenues and reducing credit card fraud.

Credit card protection companies offer a registration service to card holders. They record credit card numbers, report lost or stolen cards, provide a toll-free hotline, arrange for replacement and notify issuers if a card holder moves. Some companies add other benefits, such as providing emergency money or a plane ticket if cards are lost or stolen.

It is not an insurance service, however. When credit cards are lost or stolen, federal law limits the card holder's responsibility to $50 in illegal charges for each card. Most card issuers, because of their public image, waive the $50 payment when cards are used illegally.

The cost for protection services range from $6 to $15 a year, with lower rates for taking the service for a number of years. Safecard, generally regarded as the most successful card-protection company, offers credit card protection for $12 annually while Credit Card Sentinel, the second-largest and fastest-growing credit card protection service, charges $6 a year.

Skyrocketing credit card fraud has made these services increasing popular among both card issuers and card holders. Worldwide card industry losses from counterfeiting alone in 1981 were $15 million. In 1982, the amount soared to more than $50 million, with $47 million in losses in the United States.

More than 6.1 million of 94 million card holders belong to the top six credit card protection companies, up from 2.8 million in 1980, according to the February 1983 Nilson Report, a credit industry newsletter.

Despite the limited liability of card holders, they are selling peace of mind to their customers, the protection companies say.

These services also attract a certain category of card holder. A typical subscriber holds an average of 11.2 cards, earns $27,350 a year and is in a professional, management or sales position, according to a survey by the newsletter.

Few complaints, aside from those provoked by the Woodies case, have been lodged against either Safecard or Sentinel. But other companies have not fared so well. The Alexandria-based Credit Card Service Bureau has about 100 complaints filed against it with the Washington and Northern Virginia Better Business Bureau offices in the past three years, said Marsha Goldberger, trade practice director for the D.C. bureau. BBB records of complaints against the company date back to 1969. CCSB was also cited by the Federal Trade Commission for using deceptive business practices in the early 1970s.

David Phillips, a former Citicorp executive who became CCSB president in May, denied recent charges that the company sells customer names and other information, but an ad offering CCSB's mailing lists for sale did appear in the November issue of Direct Marketing Magazine, an industry trade publication.

The company, which charges $15 a year for membership, is providing a vital service, Phillips said. "When you're dealing with credit cards, you're dealing with a person's sense of well-being and own sense of identity. This product helps people maintain their identity."

This type of service may be particularly valuable to bank card holders, he said. Between 58 to 60 million households own bank credit cards and, in cases of lost or stolen cards, the card holders' liability is "substantially more, up to the entire amount in the checking account," Phillips said.

Bank Card Holders of America, a consumer group for credit card holders, researched these protection services and found, "The average credit card holder does not need or use any 'protection,' even when the cards are lost or stolen."

In a letter to its members, the group concluded, "Already charged a high interest rate, the credit card holder pays an additional fee for an expensive convenience that provides little, if any, added protection."

The profit margin for the companies is about 50 percent, according to The Nilson Report. The industry's revenues doubled to $75 million in the last two years and will probably do so again by 1985, the newsletter said.

Cashing in on some of the profits, credit grantors, such as department stores and banks, often sponsor these companies by endorsing promotions and supplying their customer mailing list--in return for 25 percent of the gross sales, according to the newsletter. These sponsors will net nearly $15 million in commissions in 1983, it reported.

Two frequent complaints about credit card protection services are that they somehow trick people into signing order forms and, worse, they bill card holders for the service without their consent.

In a recent offer by CCSB, card holders could try the service for six months for free and then would be billed for a five-year membership. But the five-year membership stipulation was in fine print and many card holders who wanted to try the free service complained to BBB about unauthorized billings to their Visa or Mastercard.

Placing the responsibility for error on the card holder, Phillips said people "may not have understood it, but they have certainly signed the order" before they were billed by CCSB.

The company did adjust the bills for those card holders who did not want the five-year membership, Goldberger said.

"Safecard, and indeed the credit card companies with which Safecard has contracts, have always had a policy of providing a full credit for any reason at any time if a card holder is not satisfied," said Boye. A refund is rare, she added.

In cases where a protection company refuses to refund money, a bank that issues cards can often be the loser. Guardian Federal S&L Association, now a subsidiary of American Perpetual S&L, received numerous calls in the fall of 1981 from the S&L's Visa card holders, complaining they were charged for protection that they never ordered. Guardian reimbursed the money for disputed billings and asked Secure-A-Card Inc., the protection service, for its refund. When the Kensington, Md.-based company refused to pay back the S&L, Guardian sued for more than $70,000 in money due plus $250,000 in punitive damages and charged Secure-A-Card with fraud.

Two years later, Secure-A-Card is out of business and the case is "on hold," said Roy Niedermayer, attorney for the S&L. Secure-A-Card's "scheme is to defraud the people who buy the service . But because they have recourse under the law . . . the bank ends up holding the bag."

In part to prevent these abuses of account numbers, Rep. Frank Annunzio (D-Ill.), chairman of the House consumer affairs and coinage subcommittee, is sponsoring a credit card protection bill. The bill was passed unanimously in August by the subcommittee and will be reviewed by the House Banking, Finance and Urban Affairs Committee when Congress reconvenes.

The bill, which has strong banking industry support, makes any trading, selling or distributing of credit card account numbers illegal and toughens existing laws in regard to use of lost or stolen credit cards.

"Most people don't know their account numbers are being traded like so many playing cards," said Curtis Prins, staff director of the banking subcommittee.

Sen. Paula Hawkins (R-Fla.), chairman of the Senate consumer affairs subcommittee, has also introduceed a credit card protection bill that says these actions would be illegal if performed with the "intent to defraud." Prins strenuously objected to that qualifier, arguing that intent to defraud would be hard to prove in court.

"Whether your intent is to defraud or not, you don't have any business having someone else's credit card number except in a very small number of cases," he said. "The potential for abuse is just too great."