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What sets American Express apart from other lenders

August 5, 2013

Unlike Visa and Mastercard which only process but not issue credit cards, and like Discover, American Express also issues credit cards. The origin of American Express is also very distinguished from those of the competitors. They started out as a domestic express mail service back when the US Post Office did not yet deliver packages. They made a lot of money, and very quickly established the American Express brand as a premium service provider. Later on, American Express gradually transformed itself into a financial services company while skillfully retaining and enhancing the brand nationwide and worldwide.

Amex logo. Plain and simple.

Amex logo. Plain and simple.

Throughout its history, American Express regarded brand recognition and customer satisfaction as the most valuable assets. In many cases in history, they would rather lose money than let the brand be tainted. When WW I broke out in Europe, they let customers cash their travelers’ cheques, the only company that ever did that. In the early 1960’s, in the repercussions of the Soybean scam by Tino DeAngelis, American Express agreed to settle with banks that had lent to DeAngelis’ company even though they were not legally obliged to. These are just two among the numerous instances in history where American Express paid a hefty fee to retain their reputation.

That tradition has carried through to today. American Express’s business model focuses on premium products. They charge high fees for high quality. Most of their credit cards carry hefty fees, and their swipe fees are also higher than those charged by Visa, Mastercard, or Discover. Transaction disputes are promptly handled and are most often ruled in favor of the card member. But to make up for the merchant, American Express also brings them a lot of revenue. According to American Express’s website,

 On average, our cardmembers spend about four times more than those of MasterCard and three-and-a-half times more than Visa. And we have the highest credit quality among major card issuers.

The Platinum, a signature Amex charge card

The Platinum, a signature Amex charge card

The famous Centurion "Black" card comes with a $2,500 annual fee

The famous Centurion “Black” card comes with a $2,500 annual fee

As a card member, you benefit a lot from American Express’ customer service which has ranked highest in 6 straight years, according to JD Power and Associates. This is why I use my American Express cards to buy the most expensive products. I know Amex will have my back should a dispute arise in the future. Their warranty extension policy has also been widely reported as having the easiest claim filing process.

On the other hand, American Express does not favor customers that carry credit card balances. This is in stark contrast with the majority of lenders who derive most of their revenues from interest charges on credit card balances. It is stated on their website that

Unlike other card issuers, we earn most of our revenues from cardmember spending and the business we drive to merchants rather than from lending fees and revolving credit balances.

For that reason, you should avoid carrying balances. Always pay in full by the due date if possible. American Express is relatively new to the concept of charging interest on card balances: their most premium products, and the most recognizable products, are their collection of charge cards which do not allow customers to carry balances. Their card business focuses on minimizing risk. In fact, they have the lowest write-off rate in the industry, around 2% as reported on their 2012 annual report, compared to the industry average of just under 4% as reported by the Federal Reserve. Even during the worst days following the 2008 financial crisis, in the 4th quarter of 2009, Amex posted a 7.4% write-off rate, whereas the national average was 10.6%.

Though American Express has revolving cards such as the Blue Cash Everyday, they don't like customers to carry balances.

Though American Express has revolving cards such as the Blue Cash Everyday, they don’t like customers to carry balances.

There is another, little secret, favor that Amex does for their card members called backdating. Whatever card you obtain from American Express will post the year of your Amex membership. So if your first Amex card was issued in 2005, and you get a new Amex card today, the card will be reported to the consumer reporting agencies as being opened in 2005. Your new card is 8 years old. That’s right. That’s one of the reasons why I was so excited to get my first Amex-issued card last year: http://hiepsfinance.com/2012/11/18/i-got-amex/

Well, now you understand why I wanted an Amex card so bad. ;)

In my opinion, everyone should have a card issued by American Express (not to be confused with cards processed by Amex but issued by another bank. See my earlier post that explains the distinction: Visa, Mastercard, Discover, American Express: What are they really? )

Good news for credit builders: American Express tends to favor those that have between 6 months and a year of credit history with few trade lines. Of course you need to have a perfect payment history, and you also will need to keep the balances on your current cards low. So if you have had your first credit card for 6 or 7 months, now is one of the best times to apply for your first Amex card.

Let me know if you have any questions.

Best,

Richard (Hiep Tran)

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2 Comments
  1. mexicanfoodfreak permalink

    You do an excellent job of presenting the arguments for having an American Express credit card. I wish I was wealthy enough to justify the $2500 annual fee for the “black centurion” card. However, I am happy to pay no annual fee for a Costco American Express card. I went without an American Express card for more than 20 years because I got tired of having it refused at smaller merchants throughout New England while paying a $50 annual fee.

  2. Thanks! The Centurion card is designed for celebrities, so don’t feel bad about not being able to afford one. In terms of rewards, there are many out there that would beat the Centurion card any day. The Costco Amex is an excellent card! Congrats on getting your hands on an Amex credit card – it will lead to better Amex cards down the road should you feel the need for one. You are right that American Express cards are not accepted everywhere, but as long as you have a Visa or Mastercard in your wallet as a backup (I have both) you’ll find an Amex card super helpful to have around. ;)

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