Credit Card Debt Management

The first two quarters of 2008 have been a real mixed bag for American Express. On the bright side, the company saw two rulings in its favor in legal claims that MasterCard and Visa were intentionally blocking banks from partnering with competitor AmEx. The $4 billion in settlement payments from those antitrust suits could not have come at a better time.

According to Bloomberg.com, American Express stock has dropped nearly 20 percent, historic losses within a six-month period for the company. The losses are being blamed largely on the current economic slowdown affecting consumer spending and the business climate.

What’s interesting is that even AmEx’s top clients (and the ones who the company most aggressively recruits), the big spenders with high credit scores, are having issues. According to CEO Kenneth Chenault:

“We are seeing very affluent people who have had historically very, very strong spending history with us cutting back.”

Late and uncollectible loans were higher than expected in the second quarter, according to Chenault. The company’s long-term forecasts are being put on hold until the economy improves, and tracking has halted for the company’s $4 to $6 earnings per share forecast for 2008.

The news is further proof that AmEx, Discover, and Capital One are shaky investments for shaky times. Visa and MasterCard, however, have no exposure to bad loans because they are not lenders. Though Visa and MasterCard may be more stable, many investors (very likely including Warren Buffet, who owns 13 percent of AmEx stock) might be inclined to advise the purchase of AmEx, Discover and CapOne stock while the getting’s good. America’s obsession with credit cards isn’t going away any time soon, so the companies are sure to rebound.

RapidAdvance and Humboldt Merchant Services have teamed up to revolutionize small business loans. Not sure of the interest rates on this option, but at least it’s interesting and gives small business owners more options.

RapidAdvance provides cash advances to businesses throughout the U.S., U.K. and Canada. Humboldt, meanwhile, is one of North America’s leading payment processors. Small- to mid-sized business owners will now have the option to get a loan, or “cash advance,” for business purposes. It might be to expand the business, purchase new equipment or inventory, etc.

Repayment of the cash advance would occur gradually, as a small portion of each transaction where the business owner is processing a customer’s credit card. These so-called merchant cash advances are unsecured loans with no business use restrictions, and have a high approval rating of about 80 percent, according to a press release.

It’s a good idea, supposing the fine print of the agreement would not defeat the purpose. One can’t help but wonder about that wonderful print everybody loves, the fees, the interest charges, the terms and conditions. One thing this venture does have going for it is that it joins together two reputable, well-established companies with proven track records of long-term stability and success. It’s not like it’s an uncertain new business venture.

However, with merchants already complaining about the merchants fees imposed by the credit card companies with each credit card transaction processed, one has to wonder whether business owners will really go for this. Will they be willing to have a loan repayment automatically deducted from their already slimming profits? It might be a tough sell indeed.

Wall Street analysts are dubbing MasterCard (MA) and Visa (V) shares “recession-proof stocks.” It’s no secret that these two companies have shown a solid performance. Despite the roller coaster stock market, especially in the financial sector, these two stocks have remained relatively stable.

Visa has already more than doubled its IPO price of $44 a share in mid-March of this year. Its IPO also enjoyed a record-setting take of $17.86 billion, first place in the history of U.S. domestic IPOs and third place among IPOs worldwide.

MasterCard, more veteran to the stock market scene than Visa, has been floating near or above the $300/share mark for a while. The company has $2.66 billion in cash and $229 million in debt, according to StreetSpeculator.com. The site further points out that Visa’s cash is more than twice that of MasterCard and the debt is less than half.

But what makes these two companies such buoyant choices in the violent sea of stock turmoil? No liabilities. Aside from legal disputes, something they’ve both just experienced, these two companies cannot be touched by the bad debt wreaking havoc on so many banks and other credit card companies like Discover, Capital One and American Express. Visa and MasterCard are safe because they do not make loans, they merely facilitate loans and purchase transactions. Their profit does not come from late fees and interest charges imposed on card-carrying consumers. They instead derive profit from fees imposed on banks who use their logo on cards and merchants who allow customers to pay for goods or services with their card.

It makes for a very “cash cow” stock choice, as StreetSpeculator.com puts it. July 31 is quarterly earnings report day for both companies — if profits exceed forecasts, the share values will likely soar and it could be a good day for stockholders indeed.