Markets in everything, financial crisis get rid of your customers edition

by on February 24, 2009 at 11:57 am in Economics | Permalink

This is what I call deleveraging:

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.

Addendum: Megan McArdle adds commentary.

mobile@a.aa February 24, 2009 at 1:09 pm

For mortgage lenders that are low on capital, I wonder if it would also be in their interest to accelerate payments from their borrowers. For example, they could offer to refinance their outstanding loans at a lower interest rate but with a shorter (20 year? 15 year?) repayment schedule. Or would that be too hard compared to lobbying for TARP money?

RW Rogers February 24, 2009 at 2:32 pm

JPMorgan Chase began accelerating payments from some of their credit card customers last month, raising repayment minimums from 2% to 5% of balance on their lowest interest rate products. These are customers who took balance transfer offers with low fixed rates or cashed one of those checks mailed out to existing customers that promised a fixed rate as low as 1.99% forever. To add insult to injury, they’ve apparently added a $10/month processing fee as well. If the unfortunate suckers can’t handle the massive increase in payments, they can call Chase and they’ll lower it back to 2% but the interest rate goes to 19% or more and the $10/month service fee stays.

Ryan February 24, 2009 at 2:42 pm

Notice the article mentions that these accounts are going to be closed whether the customers pay them off or not. Hence the credit card companies are really just trying to get the accounts settled for people they have already deemed sufficiently high credit risks that they no longer wish to lend. I don’t think this marks much of a change in their overall strategy of lending money, charging interest, and collecting that money. I think this is a strategy which could be usefully deployed in a healthy economic environment, considering collection expenses can be horrendous.

Andrew February 24, 2009 at 8:39 pm

I wouldn’t know a credit crunch if it crunched me in the a$$, but I think Alex’s point was that the big banks were crunched, there was forced selling and margin calls, but most banks (good bridges) were lending, and the demand for loans was dropping due to the recession. Not sure if that sums it up and whether it played out that way or not.

Rhys K.M. February 25, 2009 at 9:23 am

I personally think that this is an issue that relates to the business term “T.A.N.S.T.A.A.F.L.† which is that “There aint no such thing as a free lunch†. I think this problem first started with the American Express Company luring customers with cash rewards, was successful at doing that but exceeded the number of people that it intended to lure. American Express is now trying to get rid of some selected customers by luring them out the same way it lured them in by giving them cash rewards. The reason is because their profits or benefits are affected by the sheer number of people, and the activities of some people. Who knows, I might be wrong.

Bart February 25, 2009 at 5:06 pm

Chris you seem to be confusing borrowing with spending. I suggest you smack your economics professor in the face for his dereliction of duties. You don’t know squat about the economy, or life in general. Hint: the socks go on before the shoes. It’s my wish that you would be silent on issues, which require the thinking capacity of the human brain. When society needs someone to breath oxygen and get lost, we’ll call you. Shouldn’t you be buying truck tires and iPhones, like the other idiots? We’ve carved out the perfect niche for people like you in our economy. Wherever you are, I hope it’s padded. We wouldn’t want your spectacular brain to be damaged when you trip brushing your teeth.

Andy February 26, 2009 at 11:23 am

By selected customers it means those who have so much debt that $300 is going to be a token amount.
Still, it is interesting to see AMEX take a new approach rather then waiting for the next government bailout.

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