While its competitors are raising interest rates and slashing credit lines, American Express is offering certain cardholders $300 to pay up and take their business elsewhere.

Cardholders who choose to take advantage of American Express’s “Simplify Your Finances” pilot program would have to pay off their American Express card balance by April 30 and close the account, possibly forfeiting rewards points or rebates they’ve earned. In exchange, the company will give these participating cardholders a $300 American Express gift card that can be used anywhere American Express is accepted.

American Express spokeswoman Molly Faust told Forbes that cardholders who received the offer had rather large balances and had not been making purchases (“AmEx Introduced the Invisible Card,” Feb. 23, 2009). “This is one of the ways that we are prudently managing credit risk,” she said.

Financial analyst Scott Valentin said American Express’ approach to motivating borrowers to close off balances isn’t new; years ago National City bank offered borrowers $200 to close their home equity lines of credit (“AmEx Offers Some Holders $30 to Pay and Leave,” Dow Jones Newswires, Feb. 23, 2009).

“It’s not necessarily cheap, but it is effective,” Valentin said. “The key is to identify the high-risk borrowers.”

Incentive Program Could Improve Company’s Balance Sheet

American Express hopes its pilot incentive program will help it shed customers and reduce its risk of defaults as the deepening recession and rising unemployment rate continue to affect consumers’ ability to repay their debts.

The credit card company’s charge-offs – loans that are deemed uncollectible – rose to 8.29 percent in January from 7 percent the month before, while the number of consumers who are at least at least 30 days overdue on their payments also grew (“AmEx Pays Some Cardholders $300 to Close Accounts,” Bloomberg, Feb. 23, 2009).

American Express, which received $3.39 billion in federal funds from the government’s Troubled Asset Relief Program, reported last month that its fourth-quarter profit from continuing operations fell 72 percent to $238 million as more consumers defaulted.

Chief Financial Officer Dan Henry says the company is hurting because it grew loans faster than its competitors and because it has a large customer base in California and Florida, two of the five states leading the nation in the number of foreclosures.

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