It used to be that credit-card companies lured customers with cash rewards. Now American Express Co. is paying to get rid of them. The card issuer is offering selected customers a $300 AmEx prepaid gift card if they pay off their balances and close their accounts.
The unusual move underscores how quickly conditions have deteriorated in the credit-card market. The current economic morass was provoked by spiking mortgage defaults. But as the economic crisis widens and unemployment climbs, there is growing concern that credit-card defaults will soar into the stratosphere as well.
"This is a huge paradigm shift," says Curtis Arnold, founder of CardRatings.com, a credit-card review Web site. He says he expects other large companies to follow suit with offers to entice consumers to pay off their balances, as card issuers cope with increasing defaults.
Selected members -- the company wouldn't disclose how many -- began receiving letters with the voluntary offer earlier this month, according to Molly Faust, an American Express spokeswoman. "It's a relatively small number of cardmembers who have sizeable balances and little spending and payment activity," she says.
AmEx declined to disclose the specific criteria used to determine who is eligible for the offer. However, Ms. Faust did say that it was offered only to retail credit-card holders, not corporate accounts. Customers who received the offer have until Feb. 28 to respond.
I am willing to bet that the names of the people who got this offer were selected the same way that Amex controversially recently picked people to have their credit lines cut. They're just trying to be a little nicer about it now. Anyone who has gotten this offer would be a fool not to take it, because it means that Amex has their eye on you. They have always managed their credit risk extremely aggressively, and they're not going to stop just when it matters most.
I am also willing to bet that we see a whole lot more of this if Congress gives bankruptcy judges the ability to cram down mortgages in Chapter 13, as they almost certainly will. The provision is going to attract a lot more people into bankruptcy, and those people are going to shed a lot of their unsecured (read: credit card) debt. I'd expect that credit card lenders are already desperately trying to weed out those most likely to enter Chapter 13.
I'm hearing a lot of discussion among friends and on finance shows about a new dilemma cash-strapped consumers are facing: pay down credit card debt, or save cash? The answer used to be a slam dunk: with interest rates at 20%, you pay off the cards, and run them up again if you hit some desperate emergency. But with credit lines being slashed, that's no longer a safe bet; you could pay off your cards, get laid off, and find yourself with no safety net. Then again, if you don't pay off the cards, you're more likely to get your credit line cut. No one I've talked to has a clear answer other than: cut your spending to the bone and put half what you save thereby into a bank account, the other half into paying down your cards. Which is why all the restaurants in DC seem unusually spacious these days--when I walk by them. Even with no crushing credit card debt, we, too, are eating at home.
One wonders just how many of these offers, when accepted, will result in the outstanding AmEx balance being transferred to another card account, thereby seeing the AmEx account closed and the $300 obtained but leaving the root debt problem unchanged.
Just yesterday I got an offer for a new Visa American Airline miles card (Citi I think?). Weird since I'm within $3000 of my current limit and, until last month, was just making the minimum payment.
Was laid off in August and didn't start work until late December.
I've been getting offers for an AmEx credit card about once a week for the last few months; the only company trying to get me take out a new card now. So even as they try to cut out credit risk, they're still courting new credit.
I don't miss the daily offers from Capital One.
property taxes are for sure part of what folks might go slow on - here in Toronto, Canada, late payments to city hall have a 1% per month charge levied, but i don't know how quickly they'll move to seize your property if in fact you make partial payments - certainly outright nonpayment will attract the most enforcement/collection, but i wouldn't think that partial payments would do so - there is ofcourse a "tipping point" function involved and who knows what thast is
i think squeezed folks will pull all levers while attempting to delay bankruptcy
AmEx is trying to reposition its brand. It made some efforts unsuccessfully over the last several years to compete directly with Mastercard and Visa, while maintaining its much higher merchant fee structure.
That initiative didn't work, and now it's retreating from the broader consumer space. AmEx is trying to restore itself as a lifestyle brand with only affluent customers, with greater reliance on fee income, rather than interest payments.
Now that AmEx has settled its litigation against both Visa and MC, which beat it handily in reaching the masses, AmEx is free to shrink. The economy didn't help, but this change in positioning would have likely happened, anyway, because the mass consumer model wasn't a business model that matched AmEx's core competencies or took full advantage of its original brand equity.
This seems weird. The people who take AmEx up on the offer will be people who are not, in fact, likely to default. They have the money to pay off the balance on short notice. Those who don't take the offer will include many who just don't have the money. Maybe AmEx plans to get rid of anyone who declines the offer and offer a new account to anyone who takes it?
One wonders just how many of these offers, when accepted, will result in the outstanding AmEx balance being transferred to another card account, thereby seeing the AmEx account closed and the $300 obtained but leaving the root debt problem unchanged.
I expect approximately all of the offers will result in a balance transfer, leaving the consumer's root debt problem unchanged. It will completely eliminate AmEx's root problem with that customer, though.
Surely you didn't think AmEx was doing this to benefit the customer? AmEx has made the calculation that the balance transfer-$300 will net more than they'll get from collections. Any benefit the customer derives from the transaction is purely coincidental.
"Even with no crushing credit card debt, we, too, are eating at home."
Way to help out the local economy, Megs. The paradox of thrift in action.
Maybe AmEx plans to get rid of anyone who declines the offer and offer a new account to anyone who takes it?
In its reports to investors, AmEx makes no secret of its goal to return to its old branding. I would guess that they will make increased efforts to try to migrate those who have AmEx no-fee credit cards over to the annual fee/ non-revolving products, and to expand their lifestyle marketing.
They don't want these customers back. They want to collect fees and sell travel services as a travel/lifestyle company, not collect interest as would a bank. Customers who aren't using the cards but are paying interest are tying up AmEx's cash while not generating merchant fees or adding value to the company's mailing list. The credit card business is just going to play less of a role in the AmEx business model, and now that they've settled with Mastercard, they don't need to pretend otherwise.
My housemate's been laid off. We don't have a debt problem, but we do have a need for thrift.
@Psittakos: "The people who take AmEx up on the offer will be people who are not, in fact, likely to default. They have the money to pay off the balance on short notice. Those who don't take the offer will include many who just don't have the money."
That was exactly my first impression as I read this post. Indeed, I kept wondering if this is really a good idea for Amex.
I get the idea, that maybe Balance minus $300 is a better bet that what you'll get from a collection agency, but the people that take them up on the offer probably aren't the ones that would have gone to collections.
I can't help but wonder if the inherent quality of Amex's debt will seriously degrade once this offer has been implemented. Sure, you offloaded some debt which is admirable in a general period of deleveraging, but the debt that remains on your books is the more toxic stuff. Rather like throwing out the baby, but keeping the bathwater.
"They want to collect fees and sell travel services as a travel/lifestyle company, not collect interest as would a bank."
Is that going to work? Obviously the consumer lending business looks grim at this point, but is that old high-fee travel/lifestyle model viable at all?
Is that going to work? Obviously the consumer lending business looks grim at this point, but is that old high-fee travel/lifestyle model viable at all?
Frankly, I'm not sure. What's clear is that AmEx can't beat Visa and Mastercard at their own game of the mass consumer market, and that there probably isn't room for more than two players in that space.
AmEx doesn't have much choice but to segment the market, otherwise it's sure to lose. But like you, I do question whether a downsized segmented model is also going to work. Charge cards have become a commodity, which suggests that a high-fee/ services-based approach isn't likely going to work because many customers won't pay the extra freight.
Perhaps they'll end up with better margins, but lower absolute profits. I wouldn't be too excited about the stock.
Bankruptcy is the answer to this debt spiral. Bad loans don't get repaid...they just sit out there until people face the music. Default has been the solution since the beginning of civilization. We should remove the stigma of default, especially in the case of collateralized obligations like mortgages. A mortgage is a business transaction, not a holy promise. Non-recourse is the effective termination clause of the contract. Noone cries irresponsiblity when a borrower defaults in a rising housing market. Its only when the banks have to honor the out clause in their contract that we now hear the mewling.
This is why it's better to have an unsecured personal line of credit than a credit card - that credit limit can't just be slashed.
They do have to securitize the receivables and do something with them. I haven't checked their situation, but they might need to offload assets.
The securitization segment of consumer credit is still a mess, in general. I think all too much attention is being paid to banks and not enough to securitization.
I was just looking at Harley Davidson, and they haven't been able to securitize any of their loans since 1Q2008. They have been building up on the balance sheet, and they took out $600 million in 6 year senior notes @ 15% to provide financing.
This had to have been going on all over the place and it isn't like local banks are going to be falling all over themselves to get into the specialized area of retail lending on motorcycles.
As far as American Express goes, I have been getting solicited for a Citi/AA Advantage/American Express card. It looks like Citi card. They are using AmEx rather then Visa or MC to get higher fees. I suppose AmEx gets a cut also. It sounds like a deal for AmEx. They get to compete with Visa and MC without dealing with the credit risk.
We all need to watch from falling into the paradox of thrift trap. Go forth and spend!
My housemate's been laid off. We don't have a debt problem, but we do have a need for thrift.
It's none of my business, but is your housemate more than just a housemate? Why would you need to be thrifty for your housemate? Are you afraid that he'll/she'll disappear and leave you stuck with the entire lease?
There's something kind of interesting going on here. AmEx has worked out a way of choosing a set of people it wishes weren't its borrowers, and sort of transferring them to other banks, just by making this offer. The cool thing is, AmEx doesn't have to do any negotiating with the other banks--it just uses the open credit line that those banks have made available to those now-unwanted borrowers. Doing this on a large scale seems like it could have some really interesting effects on some of those other banks. Might there be some banks that have a huge number of their customers trying to take advantage of this offer at once? What would the effects be? Assuming AmEx is doing a better job evaluating default risk than those other banks who still are offering credit lines to those customers, they're managing to dump some toxic waste on those other banks.
Suppose this becomes common--credit card issuers start (or continue) trying to get their riskiest borrowers to transfer their balances to some other card, by making this kind of offer. In that market, where the more careful card issuers are going to some trouble to dump some of their customers, do you want to be the bank that gets those balances transferred to it? I can imagine this leading to either a massive decrease in the availability of credit lines, or a large rise in interest rates.
Surely Amex isn't making this offer to people who are equipped to make their payments. They are only offering this to the bottom x% of their clients, graded on a credit score or risk profile basis. So probably 100% of those will result in balance transfers to other cards. (Assuming those people can qualify for balance transfer options. When I was stuck in balance transfer purgatory I was never short of offers, but times have changed.) And hopefully those folks get some benefit from the $300.
As to the cash versus debt discussion, I think it breaks down like this:
* If you think that the economy will turn around soon then pay down the debt.
* If you think that the troubles are really only getting started then build up your bank account reserves.
* If you think that the bottom is about to really fall out then take most of your money out of the bank and hide it in cash somewhere, and continue to make only minimum payments.
In all three cases you should be much more frugal.
I'm already debt free, but I don't have a huge bank balance. I'm starting to hedge my bets with some cash under the mattress, so to speak. Then if the bottom really does fall out and I need to declare bankruptcy I've got a stash that isn't going to show up on any account balance statements. I don't know the bankruptcy laws that well, but I'm guessing that not declaring my little pile of cash is probably illegal. So you should consider that or talk to your lawyer before you do it.
Randy,
You might want to talk to a lawyer about the legality of not declaring a pile of cash. I think it's illegal, but there are things you can do with it, depending on state law, that shield that money from creditors to some extent even if you do declare it.
Popular methods: Home equity (up to your state's limit, and subject to certain timing restrictions)
Cash value in life insurance policies
Qualified retirement plans
Annuities
Irrevocable trusts in offshore accounts
Check state law, and definitely consult a lawyer.
Warning: Be prepared for the awkward question a sharp lawyer would ask you: If you're debt free, why on earth are you concerned about bankruptcy?
why do you keep calling your significant other "housemate". Ashamed of him /her ?
I'm already debt free, but I don't have a huge bank balance.
In that case, you'll have no cause to file BK. Bankruptcy is to shield one from debts. No debts, no need for bankruptcy protection. You'll just be broke, not bankrupt.
Surely Amex isn't making this offer to people who are equipped to make their payments.
These cardholders presumably are making their payments. If they can pay off AmEx, then presumably they have enough spare cash or debt capacity to close out the AmEx account.
This has much to do about AmEx's lousy financial management as anything else. All of these financial institutions are scrambling for cash, and pulling cash from what are now unsecured credit accounts kills two birds with one stone.
As I noted above, AmEx is trying to shift its business away from the credit card side back to the green-style charge cards of old. AmEx has the disadvantage of not having a large retail bank to provide it with a cheap source of abundant capital to support its operations. It's that deficiency that must be driving its changes to its business model, as much as anything else.
The Federal reserve has pages of data releases that speak to the problem of consumer credit. Charge off rates on credit-card debt are as of the fourth quarter in territory they occupied during the last recession, though deliquencies are a bit more severe. You can interpolate from their data on debt-service and financial obligation ratios that the share of personal income devoted to consumer debt service (not just homeowner's consumer debt service, which is explicitly listed) is quite near to the mean of the last 29 years and has been on a mild downward trajectory the last eight years. I suspect what has changed is that this debt has to be serviced in the context of hypertrophied home-mortgage payments.
I think all too much attention is being paid to banks and not enough to securitization.
Must disagree. Funds (whether they are in equities, securitized debt, municipal bonds, or whatever) gain value and lose value in amounts large or small depending on the asset. It is too bad, but it is only a crisis if you have been trading with borrowed money.
I am sorry Harley-Davidson has to service all those loans it would rather not, but problems like that do not matter o'er much in circumstances of the sort we are all in
Spooked depositors can run away and destroy otherwise viable (fractional reserve) institutions. Which is why Chiti Chiti Bank Bank merits our attention and American Express does not.
Without the data on whom they are specifically targeting, isn't this as likely to be a symptom of the consumer spending downturn as it is the credit crisis? They could be getting rid of their marginal customers at high risk of default. But they also could be getting rid of customers that for some reason are costing them more than they're worth even with good credit ratings. (e.g. those that don't use the card all that much, and are only using the 'charge' card - no revolving balance, vice a credit card.) The former is more likely, but the latter is possible.
I just joined Costco, and got a amex card through them (because that's all they have), so they are still issuing new cards. It is also possible that they are laser focusing their merchant agreements - and kicking out those that don't generally shop of the merchants they deal with, and will later drop the merchants also.
"My housemate's been laid off. We don't have a debt problem, but we do have a need for thrift."
Ditch him! The whole point in shacking up is that you can bail when things stop being fun. Judging from your use of terminology, it seems likely that you are already looking for an excuse to do just that.
You ain't married. You don't have no kids, so just pick something you don't like about the guy and tell him you can't take it any more. Then switch it around and give him the "it's not you, it's me" speech.
You think your dude is obviously a loser by the way you write about him, so quit slumming. Dating a loser is a sign of low self-esteem. Living with one is pathetic.
"I was just looking at Harley Davidson, and they haven't been able to securitize any of their loans since 1Q2008. They have been building up on the balance sheet, and they took out $600 million in 6 year senior notes @ 15% to provide financing."
Boy, that seems like a mistake.
15% a year for 6 years is a hell of a chunk of interest.
Reminds me of the car companies offering 0% interest for 5-6 years, when they are paying some obscene amount to borrow.
Like eating your own leg to survive a bit longer.
There seems to be a ghoulish interest in the domestic arrangements around here. Perhaps one or the other will eventually work up the nerve to diffidently offer to be the replacement?
Best one so far: why do you keep calling your significant other "housemate". Ashamed of him /her ?
Signed, in what would appear to be shame of its real name, 'ratisbon'. Oh, this is too much.