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American Express pays clients to close accounts
Will other credit card firms do the same?

By Linda Leatherdale
A Companion Advisor article

Here's a surefire sign our economic woes are getting worse.

Amid a growing credit crunch that's crippling the world's financial system pushing bankruptcies and loan defaults ever higher, American Express is offering its U.S. clients US$300 to pay off their balances and close out their accounts.

A spokesperson for American Express Canada said no similar buyout plan is being considered in Canada, where credit card delinquency rates are on rise, but nowhere the level of the United States.

Still, some experts warn if more jobs are lost - a growing number of Canadian households, struggling with record household debt $1.3 trillion, will default on payments. And that could spark rescue plans similar to the AmEx plan, to get the most destitute wiped from the books.

Latest stats estimate Canadian families owe $70 billion in credit card debt, with an average of 4.1 cards in every wallet. A credit card is considered in default when unpaid balances exceed 30 days.

American Express, considered the credit card company for the wealthy, at one time only charged an annual membership fee for the privilege of holding its card. No interest was charged since cardholders were expected to clear off balances when they came due.

But, with the explosion of our borrow now, pay later world - AmEx too ventured into the riskier mid-tier market.

By year-end 2008, its fourth-quarter profit plunged 72% to US$238 million from $858 million a year ago. Its profit for its U.S. Card Services division fell to $4 million from $7 million a year ago. AmEx announced it was taking a pre-tax charge of US$440 million to raise worldwide lending reserves to 100% of past-due loans and increase reserves related to its credit card portfolio.

"We are looking at different ways that we can manage credit risk based on the customer's overall credit profile," said an American Express spokesperson, who explained the offer of a US$300 pre-paid American Express card was sent to a select number of clients, who have until the end of February to pay off balances and close their accounts by March or April.

Capital One - one of the largest issuers of MasterCard and Visa - is also feeling the crunch, with its share price down more than 70% as its default rate on U.S. credit cards jumped to 7.82% in January, while the rate for loans at least 30 days delinquent increased to 5.02%.

Capital One said its expects loan losses from U.S. cards to jump to 8.1% in the first quarter of 2009.

Meanwhile, Fitch Ratings reported late payments on U.S. credit cards topped record levels in January and defaults soared to just under all-time highs.

My advice has always been debt is out - cash is king. If you get an offer of cash to pay off a card and a close an account - do it.

Bottomline is the gouging continues with credit card companies hiking their rates of interest to make up for losses, with some charging 26% and higher on outstanding balances, even with the Bank of Canada rate at a record low of 1%.

Trust me: You're not going to get 26% on your savings. Don't be a slave to the system. Get debt free.

Visit Linda at www.lindaleatherdale.com and tune into Newstalk CFRB 1010 at 7:30 a.m. for her financial commentary with Bill Carroll.

Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments in this article are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein. Readers should seek advice that is appropriate to their personal circumstances from a professional advisor.

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