Crunching credit

Via Tyler Cowen, I learn that American Express continues to aggressively deleverage.  This time, they're using the carrot instead of the stick:

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.

AmEx declined to disclose the specific criteria used to determine who is eligible for the offer. However, Ms. Faust did say that it was offered only to retail credit-card holders, not corporate accounts. Customers who received the offer have until Feb. 28 to respond.

I am willing to bet that the names of the people who got this offer were selected the same way that Amex controversially recently picked people to have their credit lines cut.  They're just trying to be a little nicer about it now.  Anyone who has gotten this offer would be a fool not to take it, because it means that Amex has their eye on you.  They have always managed their credit risk extremely aggressively, and they're not going to stop just when it matters most.

I am also willing to bet that we see a whole lot more of this if Congress gives bankruptcy judges the ability to cram down mortgages in Chapter 13, as they almost certainly will.  The provision is going to attract a lot more people into bankruptcy, and those people are going to shed a lot of their unsecured (read:  credit card) debt.  I'd expect that credit card lenders are already desperately trying to weed out those most likely to enter Chapter 13.

I'm hearing a lot of discussion among friends and on finance shows about a new dilemma cash-strapped consumers are facing:  pay down credit card debt, or save cash?  The answer used to be a slam dunk:  with interest rates at 20%, you pay off the cards, and run them up again if you hit some desperate emergency.  But with credit lines being slashed, that's no longer a safe bet; you could pay off your cards, get laid off, and find yourself with no safety net.  Then again, if you don't pay off the cards, you're more likely to get your credit line cut.  No one I've talked to has a clear answer other than:  cut your spending to the bone and put half what you save thereby into a bank account, the other half into paying down your cards.  Which is why all the restaurants in DC seem unusually spacious these days--when I walk by them.  Even with no crushing credit card debt, we, too, are eating at home.