American Express has found a clever way of getting rid of some of its worst customers without provoking a public outcry: it’s paying them to cancel their cards.
Mary Pilon, superstar consumer reporter for the Wall Street Journal, explains:
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.
Will Keynesians decry this? After all it is kind of the paradox of thrift writ large. While we want companies to protect themselves from credit risk, this move will obviously reduce the buying power of the customers who take the offer.
There’s also a point about moral hazard here. The offer won’t be made to the best customers of American Express. Card holders with good credit histories and sizable incomes won’t have the opportunity to take the $300. The payments will be made, instead, to risky customers.
And, finally, we wonder if politicians will object. Should AmEx, which converted to a bank holding company last year and took $3.4 billion from TARP, be paying off bad customers with taxpayer money?
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