In the fast-growing business of marketing credit cards, it really pays to know who the best customers are.

That's the lesson of Capital One Financial Corp., which until last month was a division of Richmond-based Signet Banking Corp., and is one of the credit card industry's rising stars.

The Falls Church company relies on an "information-based strategy," said Richard D. Fairbank, chairman and chief executive. Capital One uses carefully analyzed customer credit information to pick out potential credit card holders who are unlikely to default, but who still are likely to pay interest.

"The strategy is really very simple," Fairbank said. "It's founded on the realization that the credit card business isn't really a banking business. It's an information business."

The company, which has 2,600 employees, has turned this "simple" idea into a recipe for phenomenal growth in a $300 billion industry that also is expanding rapidly as more people turn to credit cards and other non-cash, non-check means of making payments, such as debit cards.

Capital One started as a division of Signet's Virginia bank, run by Fairbank and Nigel Morris, now president and chief operating officer. The two men, both former bank consultants, had big ideas of how to run a credit card business and were hired by Signet in 1988 to implement them.

Capital One had 5.05 million card holders in 1994, up from 3.12 million in 1993 and 1.67 million in 1992. Its receivables -- in this case, the loans due from card holders who pay Capitol One interest -- also have grown rapidly, from $1.98 billion in 1992 to $4.83 billion in 1993 and $7.38 billion in 1994. Net income last year was $127.2 million, before a one-time charge of $31.9 million for the separation from Signet, compared with $110.5 million in 1993.

"They were the fastest-growing company over the past two years," said Anthony Davis, an analyst with Dean Witter Reynolds in New York. "They're growing 25 percent per year in receivables," the loans outstanding to card holders, he added.

Morris, like Fairbank, was a bank consultant at Strategic Planning Associates, a Washington consulting firm, and now is the president and chief operating officer of Capital One. For the first few years that he and Fairbank ran Signet's credit card division, the bank invested in the computers and databases necessary to process the information needed to find customers. Fairbank would not say how much Signet spent.

Fairbank and Morris were looking for the hard-to-identify, ideal credit card customer -- the low-risk revolver. A low-risk customer pays debts, while a revolver does not pay them immediately at the end of the month and so pays the bank interest. The bank looks at potential customers' credit histories and compares them with a composite of characteristics exhibited by the low-risk revolver.

Because the bank was able to weed out riskier borrowers and so reduce the risk of card-holder default, it could charge lower rates on its cards, much as an insurance company might lower premiums for nonsmokers but keep them high for chain-smokers. With its analysis of customer credit information, Signet could better identify the financial equivalent of a smoker.

"There is a terrific and tremendous investment that the company made in its marketing process," said Robert Hottenson, an analyst with Goldman Sachs in New York. "It is much more difficult than it might seem, than to just throw letters in the mail."

Signet's investment in technology began to pay off in the early 1990s, when the number of its credit cards started to soar. Since mid-1992, the company's annual outstanding credit card debt has grown from $1.7 billion to $7.5 billion. Profit has increased from $25 million for Signet to nearly $100 million for Capital One, excluding a one-time charge caused by the separation from Signet.

Capital One shares closed Friday at $18.87 1/2, down 25 cents, on the New York Stock Exchange.

Signet targeted low-risk revolvers through direct mail offers and low rates -- an introductory fixed rate of 5.9 percent on a no-fee card, which is at the low end of industry rates -- to borrowers that the bank identified as low risk. Fairbank would not disclose those customers' characteristics.

"That is proprietary," Fairbank said. "We have people knocking down our doors" to find that out.

However, he was willing to share the results. The percentage of credit card borrowers who defaulted dropped dramatically, from 5.18 percent in 1992 to 2.09 percent in 1993 and 1.48 percent last year. Losses for AT&T's Universal Card, in comparison, were 3.2 percent in 1994.

Fairbank gave an example of the kind of research Capital One conducts to identify potential customers. Given a hypothesis about who would be a profitable customer, Capital One runs a controlled test: One group of customers might be targeted for a certain type of marketing, while another would not. Then Capital One could tell, over time, which strategy made more money.

That kind of information helped Signet identify customers of other banks who might be paying high interest rates even though they were unlikely to default.

Signet "was one of the first companies to realize that there was a lot of potential with existing customers of other financial institutions," according to Hottenson. Signet would offer those people cards with lower rates, he said.

The success of the credit card division posed serious financial problems for Signet Banking Corp., though. Because it was growing so rapidly, the division consumed the bank's assets, personnel and equipment to extend and service credit to a growing number of card holders, leaving the bank with less for its other business lines. So in 1993, Signet executives decided to spin off Capital One.

"It was a very different reason to spin off Capital One," said Teri Temples, a spokeswoman for Signet. "It's not very common for companies to spin off a profitable business."

Signet's original decision to bolster its credit card operation, back in 1988, was more common. The fast-growing and lucrative credit card market is extremely fragmented, according to analysts, so a little luck can net a newcomer a small share.

And different firms are targeting customers in very different ways, some using information on individual credit histories to pick customers, much as Capital One does, and others using simpler mass-mailing or other plans.

"If you're General Motors, what you're trying to do is target people who use automobiles. So you package the credit card as part of an overall positioning where that product can then help with other products," said David Hunt, president and chief executive of AT&T's Universal Card Services Corp., which is the nation's fourth-largest issuer of credit cards. Hunt, an alum of Signet's credit card operation, joined AT&T in 1993.

"We got into the credit card business really to help in the long-distance business," he said. "We have a very large, valuable brand and everything that we do here has to" enhance that, he added.

Other banks also are hoping to expand in the credit card arena. "We want to be one of the survivors and thrivers in this business," said Hugh C. Long, Washington area president for First Union Corp. The bank, based in Charlotte, N.C., is the ninth largest in the country, but its credit card business ranks only 23rd.

"We've made significant investments in the business and in upgrading our customer service," said Robert Stock, director for NationsBank Corp.'s credit card operation. The bank markets its cards directly through its branches, as well as direct mail, which Stock said was an advantage. NationsBank increased its card-holder customer base by 20 percent in 1994.

Capital One hopes to use the information it has built up on customers to sell other, perhaps unrelated, products that customers might not even know they want or need, according to Capital One's Fairbank. The company might provide consumer finance services, home-equity loans or auto loans in the future, he said.

"Those are natural businesses to consider because they are very similar to the credit card business," Fairbank said. "They're information-based lending businesses, {and} our skills are related to using information to lend money through the mail, so to speak." * CAPTION: Capital One's Richard D. Fairbank, left, and Nigel Morris had big ideas of how to run a credit card busniess. CAPTION: Capital One in Profile NAME: Capital One Financial Corp. HEADQUARTERS: Falls Church. CHAIRMAN: Richard D. Fairbank (CEO) PRESIDENT: Nigel W. Morris. OWNERSHIP: Formerly a subsidiary of Signet Banking Corp., Capital One was spun off as a separate company on Feb. 28. EXCHANGE: NYSE. BUSINESS: Issues Visa and MasterCard credit cards. Source: Bloomberg News Services, Capital One Financial Corp.