American Express Scales Back

If American Express (AXP) is struggling with past-due loans, why shouldn't it be struggling with performing loans too?

Last year our company spent almost $1 million with American Express, an average of over $81,000.00 per month. We paid the full balance every month - on time. Last week a representative from American Express called our controller to thank us for our spending last year. This week, with no warning, we have been cut-off after spending only $39,000.
When our VP of Operations was denied a charge after booking flights for many managers to attend a conference, he called the accounting department to find out why. We immediately called AMEX to resolve whatever problem so that our business could continue operating normally. What they told us was disturbing....
After living on the hold line for over an hour, they agreed to a compromise, we were to pay the current balance and they were to do nothing. When we picked ourselves up off the floor we asked what was going on. Why would American Express only want $300,000 of our business instead of $1,000,000?

It's a good question; here's a stab at an answer.

There are basically two different ways that a lender can judge creditworthiness. The first is credit history: when the borrower has borrowed money in the past, have they always paid it back on schedule? During normal times, it's a reasonably safe assumption that someone who's always paid their bills in full and on time will continue to do so going forwards.

These are not normal times, however, and lenders are revisiting a lot of the assumptions they made during the boom years (like "house prices don't fall simultaneously across the USA"). And so now they're asking themselves whether the credit-history assumption will hold.

For there's another way of judging creditworthiness: simple ratios, like debt-to-income, or assets-to-liabilities. (Or, in the housing world, loan-to-value.) If those ratios start implying that the borrower won't be able to repay the loan, then it might be a good idea to scale back the loan - even if the borrower has always repaid their loans in the past. After all, it's a good idea to scale back before the borrower defaults, rather than waiting for the inevitable.

So what Amex is doing might actually make sense, although it does admittedly look peculiar at first blush. But it's certainly another datapoint to add to the list of credit-crunch indicia.

Comments

[helplessobserver]

If I read this post right a major lender is cutting off credit to a high quality borrower because he doesn't carry a balance or is worried if he builds up a balance he won't pay it off. I have never seen this before, but if it spreads to other card issuers and they cut off good customers as well as the deadbeats a lot of buying power will slip away as cumbersome cash transactions move in to fill the void. Not good for online retailers.

[WAKEUP]

This overreaction by American Express is a good example of the mind-freezing paranoia which is creeping (galloping?) through the financial companies, now. It will get worse, along with the rest of the financial scene, as Depression II settles in. Keep in mind that these bizarre actions by companies are the result of their first sightings of potential new troubles, ahead. What will they do, when the main body of barbarians come screaming down the hill?

[LongAMEX]

Unfortunately, AMEX is being prudent. AMEX and other card issuers are evaluating credit lines across small business and consumers to determine appropriate credit access. I think the above company is merely experiencing something all organizations in a similar position will face.

As a side note this represents the perfect reason to diversify credit sources. (e.g. cards from multiple issuers, credit lines from other issuers, etc.)

[Red Rose]

Wells Fargo cut our credit line by $10,000.00 a month as well because we always pay on time, doesn't nake sense does it. So, we now refuse to do business with them at all. They in turn have been begging us to come back, come back? Are they crazy? The answer is yes! They actually think we'd come back after reducing our credit line by $10K a month, we told them where to stick their stage!

[Don't:evaHomeWithoutOne]

My business AMEX credit line was recently cut from 35k to 10k. Member since 1999, immaculate payment record, profitable business with millions of dollars in annual revenue. This was done with no warning, while I was traveling overseas, leaving me stranded. Reason quoted: an issue on my personal credit report. Turned out, it was a $40 dispute with a credit card company, dating back to 2005, which was a mistake in the first place. Corrected the mistake, and AMEX claims they will review the credit line again once the credit file is updated. We'll see about that.

[Humiliated]

Our personal account was restricted three times this month. In 20 years we have never been late with a payment, always paid as agreed. This month we were asked to pay our 14K balance in full well before the due date and we were assured that our charging rights would be reinstated. We paid the balance early as requested. Today, at Best Buy, in front of a line of impatient customers, I wasn't just declined--I had to show ID, talk, in front of the line of customers, to an American Express representative on the phone who asked me first to identify myself and then told me they had cut me off. 20 years of being a perfect customer, paying often in excess of 15K a month, on time. Frankly, I don't care what my credit report shows. The reality is that I was late on two small accounts because I signed up for online statements and then had trouble logging on. No excuse, but the total past due on those accounts was well under $200.00 and in no way affected my ability or proven history of paying American Express. The point here is that any time I'm late on any of my outstanding accouns, go over the limit, I'm financially raped with late fees, interest hikes, and overlimit fees, all of which I cheerfully pay. The one bill I always make sure to pay first is my Amex. For 20 years. I don't agree with their global default analysis of the credit worthiness of long-term customers with impeccible payment histories, but I'd be fine with it if they simply issued a warning. They have my email address, that's where they send my statements. So, when they decide to cut me off, I'd appreciate an email letting me know that if I try to use my card, as I have for 20 years, I'm going to be humiliated and treated like a deadbeat.