If American Express 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.