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Markets in everything, financial crisis get rid of your customers edition
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.
Posted by Tyler Cowen on February 24, 2009 at 11:57 AM in Economics | Permalink
Comments
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?
Posted by: mobile@a.aa at Feb 24, 2009 1:09:00 PM
Alex Tabarrok was arguing a while ago that there wasn't a credit crunch; is this a damning piece of evidence against him?
Posted by: talisman at Feb 24, 2009 2:15:07 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.
Posted by: RW Rogers at Feb 24, 2009 2:32:40 PM
So, my parents bought a new car a few years ago. They got a cash incentive to take out a loan. They told the guy "we are just going to pay it off Monday." The guy said "I don't care." The car company was paying him(!) to write loans, not check to see if the loans could be paid, or pre-paid.
My parents just got a car fixed. They got two estimates, one for $2300 that replaced the frame and one for $800. They got the $800 job. The insurance company told them "we don't stand behind the old frame." And they gave them the whole $2300.
There is a lot of idiocy going on out there. It has become funny money to a lot of people.
Beyond that, in normal times, why would you want people to pre-pay? Are the value of all loans dropping in terms of net present value compared to cash?
Posted by: Andrew at Feb 24, 2009 2:39:56 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.
Posted by: Ryan at Feb 24, 2009 2:42:49 PM
Oh and by the way, credit card companies are still offering me money to open new accounts or take advantage of the credit limit of my existing accounts by paying off other bills with my credit card. They still want to lend money and why shouldn't they?
Posted by: Ryan at Feb 24, 2009 2:46:49 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.
Posted by: Andrew at Feb 24, 2009 8:39:13 PM
You know, Tyler, commenters could be considered blog "customers". I'm just sayin'.
Posted by: at Feb 24, 2009 9:49:45 PM
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.
Posted by: Rhys K.M. at Feb 25, 2009 9:23:23 AM
I think what some have avoided mentioning is that one of the biggest reasons why we're in the recession we are in, is because loans and credit card companies were persuading people to take big loans they couldn't pay back, as well as take on credit cards that charge an interest rate that makes it hard to pay off quickly. With a situation as is now, profit margins have been incorporating debt, that in theory was to be paid off and then some. This was to be done by those who couldn't afford the things those cards and loans were used for in the first place. Clearing the debt ridden population of those debts is a double-edged sword in that the hopes of those people to pay it off is unlikely, but at the same time without it people aren't going to consume or use credit cards. Keeping people with debts in with these companies is less profitable and sustainable for these companies as opposed to getting them out. So it seems like those that have accumulated these debts are getting either an incentive or copt out for what is partially their own fault. At the same time, those who are paying off their bills regularly and sensibly are getting little to no benefit, while having to pick up the slack for these companies and their losses. Money was used in the form of advances to influence certain people to get credit cards in attempts of maximizing profit through debts, that went wrong, and now another incentive is being given to get them out. Not a very fair or longitudinally sound business tactic. Or what I like to call a misallocation of positive reinforcement.
Posted by: Chris (920165369) at Feb 25, 2009 4:17:35 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.
Posted by: Bart at Feb 25, 2009 5:06:15 PM
This whole plan is probably one of the worst that has been formulated since this recession began. It makes sense that the companies would be afraid that most people will not be able the pay off their accounts, but I think they'll probably lose much more money this way. I don't understand why this recession is getting so much attention. Historically, it's nowhere close to being the worst. The credit card companies are doing what they think is best, and you have to respect that, even though it isn't a smart idea. I say, if you're a customer, capitalize on this opportunity.
Posted by: Joe4712 at Feb 26, 2009 9:24:37 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.
Posted by: Andy at Feb 26, 2009 11:23:12 AM
The only reason credit card companies are doing this is to save there assests by getting the debters to pay off there dedts so they dont lose money during this recession. Once the economy stablizes the credit card companies are gonna go right back to getting people into debt with high interest rates. Its good to see a company try to do something themselves instead of try to get bailed out by the government but this plan is horrible.
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