Question

Service Company Insight American Express That Letter from credit card account? American Express decided to offer AmEx Might Not some of its customers $300 if they would give back their Be a Bill credit card. You could receive the $300 even if you hadn't No doubt every one of paid off your balance yet, as long as you agreed to give up you has received an invis your credit card. tation from a credit card Source Aparajita Saha-Bubna and Lauren Pollock, "AmEx Offers company to open a new Some Holders $300 to Pay and Leave," Wall Street Journal Online account some of you February 23, 2009). have probably received three in one day. But what are the relevant costs that American Express would how many of you have need to know in order to determine to whom to make received an offer of this offer? (Go to WileyPLUS for this answer and additional $300 to close out your questions.)

Answer 1

Considering the decision made by Amex , it is willing to pay back the customer $300 to give up their credit card which implies that the cost of having the card in its portfolio is more costlier. American express is making this offer to those customers whom its expects will default. The most relevant cost in making this decision will be the expected loss in case of customer default. Amex must have forecasted that in case of high probability of a customer default, the expected loss will be much higher than the $300. In case the customer defaults, the cost of collection or the write off of the debt will certainly be much higher since credit cards are unsecured. This is loss control measure which will save the bank from higher losses and paying back the customers will serve as an incentive rather than forcing them to close the accounts by making full payments right away.