In one of the oddest moves in the ongoing saga of Credit Card Issuers Gone Wild, American Express has unveiled a plan to pay cardholders a $300 gift card to close their credit card accounts. For consumers fortunate (or unfortunate) enough to get this offer, there are a number of rather important factors to consider before accepting or declining this offer. However, there are also a few situations where consumers could actually gain by getting the Ax from Amex. Here’s how:
1.) Do a 0% Balance Transfer: If you are currently paying an interest rate of 10% or more, you could save a few hundred dollars a year with a balance transfer credit card. For example, if you carry a $5000 balance on a credit card with a 13% interest rate, you would could save close to $700 on interest over the course of a year with a 0% APR balance transfer, plus a $300 giftcard from American Express. This would essentially put another $1000 in your pocket.
However, this option does have some risks. For example, closing your American Express card could hurt your credit score, especially if this is one of the credit cards you have had the longest. In some cases, the effect on your credit score might make the difference between getting approved for a 0% balance transfer credit card or not getting approved.
Consequently, if you plan to capitalize on the Amex Ax, apply for a 0% balance transfer credit card before closing your account. This may also help limit the damage of closing your Amex account, as you will replace some of the credit line you would have lost.
2.) Use Excess Savings to Pay off Your Debt: Okay, not too many of us have extra savings lying around, but if you do, you’ll earn a better return on your cash than you might in a savings account. If, for example, you have a $5,000 balance and opt to close your account, you’ll earn a 6% return on that money, plus save whatever interest expense you might have incurred.
However, as with the balance transfer strategy, the effect closing your credit card account will have on your credit score could be substantial. Thus, even if you choose to pay off your credit card, you may be able to limit the damage to your credit score by opening a new credit card account. Plus, this will also provide you with a credit line for emergencies.
3.) Be Thankful American Express is Kind: During the past six months, Chase, Bank of America, and many other credit card issuers have been closing consumer accounts and raising interest rates on consumers who choose to keep their accounts open. Most credit card issuers have been approaching consumers with, “offers they can’t refuse.” For example, some banks gave consumers this ultimatum: close your account or pay a 30% higher interest rate. There were no gift card offers there.
4.) Prepare for Future Credit Card Turmoil: Even if you didn’t personally get the Ax from Amex, the $300 gift card bribe highlights the growing struggles of the credit card issuers. While things will get better, there is little evidence that this will happen anytime soon. Thus, if you are carrying large balances on high interest credit cards or increasing your monthly debt, be prepared to get an offer from your credit card company. And don’t be surprised if they are not offering you a $300 gift card.
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