American Express cardmembers: you're being watched -- closely. That's the takeaway from American Express's second-quarter earnings conference call, which was held July 21.
Chief executive Kenneth Chenault, responding to a question from an analyst, said that American Express has been targeting cardmembers for credit-line reductions who live in some of the most challenged real-estate areas. The targeting, though, has been "very, very surgical against those customers that we believe, based on our modeling, have a higher risk," Chenault said. But it's not just real-estate hampered cardmembers who are being scrutinized.
Daniel Henry, chief financial officer, said that American Express continues to "see the big significance in geographies where housing prices have fallen the greatest, but recently we have actually started to see a greater impact in customers who were in that middle cycle band. Generally it is customers with low FICOs where you see the greatest impact and we are certainly seeing it there." But, he added, "we are now seeing it creep into FICO scores of people between 650 and 750."
In other words, folks, American Express is monitoring the situation closely. Its models are scouring customer lists, looking for any sign of distress. Knowing this, it's not surprising that there has been an upswing in the number of American Express cardmembers who have seen their balances "chased." This happens when you pay off part of your balance and American Express reduces your credit limit to just above your new balance. So-called balance chasing makes the customer look as though he or she is maxed out on the credit card as well, which hurts the customer's FICO score. It's bad news for the customer.
So what do I go out and do -- about 24 hours after the conference call ended? You can see this coming from a mile away, huh. I applied for an American Express card, of course. Even in the face of all this American Express doom and gloom, I figured that there was no better time than the present for me to grab my first American Express card. My scores were solid (somewhere between 740 and 760) and I was applying for a charge card (as opposed to a credit card).
My thinking, leading up to the application, went something like this: I don't live in an area of the U.S. that has been hit hard by real-estate issues. In fact, the real-estate market where I live is holding up remarkably well. Give me a point. Next, my credit history is lengthy and my record is strong. Chalk up another point. Rather than applying for a credit card (which would be assigned a credit limit), I decided to go for a charge card. Charge-card purchases must be paid off -- in full -- every month. American Express won't need to monitor my month-to-month balances. There won't be any. Give me another point. I plan on using the card regularly, which is what American Express's "spendcentric" business model (use it or lose it) prefers. Give me yet another point. In sum, I figure that I look like American Express's model customer. Not surprisingly, I was approved instantly.
By the way, I fully expected the approval. As part of my homework, I learned that American Express has historically been more lenient when it comes to charge-card approvals. During the second quarter, charge-card applicants (who were approved) had, on average, a FICO score of 738. The average credit-card applicant, meanwhile, had a score of 750. (Note that American Express does not rely on FICO scores exclusively to approve cardmembers; instead, it uses its own internal scoring system, which gives FICO between 20% and 25% weight in the internal-scoring model. The source for the 20% to 25% figure comes from American Express's August 6, 2008, Financial Community Meeting. The figure was given during the Question and Answer portion of the conference call.)
Here is the FICO chart that American Express used during its second-quarter earnings conference call:
(If you're interested, here is the pdf file to the rest of the slides that were presented during the earnings conference call. In the meantime, if you are an American Express cardmember -- or thinking about being a cardmember in the future -- you should absolutely read the transcript from the earnings call. I was able to glean a ton of information about the company's cards and philosophy. It can be accessed here.)
EDIT (August 7, 2008): Since publishing my original blog entry, American Express has rolled out another presentation. The company held a financial community meeting on August 6, 2008. During that financial community meeting, Al Kelly, president of U.S. Card Services at American Express, presented his view of current market conditions. He zeroed in on American Express's US portfolio. One particular slide (picture below) was interesting.
Look at some of the card actions that American Express has been taking in its card portfolio. Bullet point five means that American Express is not tolerating people who don't use the card. Additionally, American Express is stepping up its monitoring of those who have high limits. I haven't changed my stance. Watch your back when it comes to American Express. They've got a microscope on everyone. If you are interested in hearing the conference call, here is the link (2 hours 42 minutes).
If you'd rather read the transcripts from each of the presenters, you can read them here (Ken Chenault), here (Al Kelly), and here (Ed Gilligan). The transcripts, meanwhile, do not cover the Q&A portion of the call. You'll have to listen to the audio if you want to find out what was said on the Q&A. END EDIT.
Just as an aside, American Express rolled out its first charge card in 1958. From the beginning, American Express has always been a paid-in-full kind of outfit. That's its core competency. It stayed that way until 1987, when the company unveiled its first credit card (a card that could be paid off over time). When I applied for the charge card last week, that's exactly the kind of information that was floating through my mind. I wanted to resemble what I figured American Express would classify as its classic customer. As a result, I felt that getting a charge card, which I'd have to pay in full each month, was the right move.
As for my friends who already have an American Express relationship, I'm frank with them. No one is immune from American Express's risk modeling right now. Still, I am telling them to keep balances low throughout their entire credit portfolio (American Express does a lot of account reviews). I'm also recommending that they keep no balances on their American Express accounts. They should also carry a backup card or two (Visa, Mastercard, or Discover) just in case American Express shuts their cards down at the most inopportune time (like when you're on vacation in Europe, for example). Moreover, I'm telling them to keep their American Express cards active. In essence, I think the best course of action, during this difficult credit climate, is to look as much as possible like the American Express customer of 1958 to 1986.
I've got my American Express game plan in place.
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