Discover Financial Services reported a smaller-than-expected quarterly operating loss as the fourth-largest U.S. credit card network cut costs and bad loans grew less than expected, sending its shares up 5.5 percent.

Discover's expenses fell 10 percent as it cut 500 jobs and trimmed marketing spending, and its credit card default rate remained well below levels at its bigger rivals.

The Riverwoods, Illinois-based company reported an operating loss of $69 million, or 18 cents per share, for the fiscal second quarter that ended May 31. That compared with an operating profit of $202 million, or 42 cents per share, a year earlier.

Analysts, on average, had forecast a loss of 29 cents a share, according to Reuters Estimates.

Net income was $226 million, or 43 cents per share, helped by $295 million from an antitrust settlement with Visa Inc and MasterCard Inc . Year-earlier net income was $234 million, or 48 cents per share.

With default rates at the highest level in history, credit card companies are the latest victims of an economic crisis that began with the collapse of the U.S. housing and subprime mortgage markets and spread around the world.

Discover's charge-off rate -- the percentage of debt it does not expect to be repaid -- climbed to 7.79 percent in the second quarter from 6.48 percent in the first quarter but was well below rates at its bigger rivals.

That sounds fairly low. That would be something that, at least on the surface, is optimistic or positive compared to other credit card companies, said Ken Crawford, a senior portfolio manager at Argent Capital Management.

Thanks to its conservative expansion policy in recent years, Discover is less exposed to bad loans than most of its rivals.

The company forecast its charge-off rate would rise to between 8.5 and 9.0 percent in the third quarter, still well below the 10 percent-plus expected for bigger rivals such as Bank of America Corp , the second-biggest issuer of Visa-branded credit cards, and American Express Co , the largest credit card company by sales volume.

While the rise in unemployment continued to have a significant impact on our financial results, I am pleased with our ... performance in both credit management and sales volumes, David Nelms, Discover's chief executive, said in a statement.

The company set aside $108 million in the second quarter to cover credit losses.

Managed loans were unchanged at $51 billion, but Discover Card sales volume fell 4 percent to $21 billion.

Discover shares were up 49 cents to $9.40 in morning trading on the New York Stock Exchange.

(Reporting by Juan Lagorio, Editing by John Wallace)

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