What Is an American Express Card?

An American Express card, also known as an “Amex” card, is an electronic payment card branded by the publicly traded financial services company American Express (AXP). The company issues and processes prepaid, charge, and credit cards. American Express cards are available to individuals, small businesses, and corporate consumers across the United States and around the world.

Understanding American Express Cards

American Express cards are issued by American Express and processed on the American Express network. American Express is one of only a few financial service companies in the industry that has the capability to both issue and process electronic payment cards.

American Express is a publicly traded company in the financial services industry. It offers both credit lending and network processing services, giving it a broad range of competitors in the industry. As with traditional lenders, it has the capability to issue credit products, which it provides in the form of charge cards and credit cards.

American Express has its own processing network that competes with Mastercard (MA) and Visa (V). Its most comparable competitor is Discover Financial Services (DFS), which is also a publicly traded financial service company offering both credit lending and a processing service network. With multiproduct capabilities, American Express generates revenue from both interest-earning products and network processing transaction services.

American Express Fees

American Express generates a significant portion of its revenue from transaction processing. Many merchants accept American Express cards and are willing to pay the transaction fees associated with processing because of the advantages that come with offering American Express as a payment option to customers.

In an American Express transaction, the merchant’s acquiring bank communicates with American Express as both the processor and the issuing bank in the transaction process. Merchant acquiring banks must work with the American Express processing network to transmit communications in American Express transactions. American Express is also the issuer that authenticates and approves the transaction. 

Merchants pay a small fee to American Express for its processing network services, which are part of the comprehensive fees involved with a single transaction. As both a processor and high-quality lender, American Express has built a strong reputation in the financial services industry.

Types of American Express Cards

As noted above, American Express credit cards and prepaid debit cards are offered to a variety of both retail and commercial customers. It is also an industry-leading provider of charge cards, which offer month-to-month credit with card balances that must be paid off each month.

American Express charge and credit cards follow standard underwriting procedures. The company seeks good- to high-credit quality borrowers—which means a credit score of at least 670—and generally is not a subprime lender.

American Express credit and charge cards come with a variety of benefits in the form of rewards points and travel perks, which depend, in part, on the annual fee charged. American Express cards may offer cash back on certain purchases, though they aren’t among the best cash back cards currently available. American Express also offers numerous branded prepaid debit cards, which can be used as gift cards or special-purpose reloadable payment cards.

Annual fees for American Express cards tend to run high: $95 for the Blue Cash Preferred Card, $99 for the Delta SkyMiles Gold American Express Card, $150 for the Green Card, $250 for the Gold Card, and $550 for the Platinum Card. That said, the Green, Gold, and Platinum cards have no predetermined spending limits. American Express does offer at least six cards with no annual fee. Customer service for all Amex cards is highly rated, with the company coming in No. 1 on J.D. Power’s 2020 U.S. Credit Card Satisfaction Study.

Partnerships, co-branded cards

American Express issues many of its cards directly to consumers, but it also has partnerships with other financial institutions. In the U.S., for example, Wells Fargo issued an American Express card (new applications were paused in April 2021, although this doesn’t affect current cardholders), and in Mexico, Banco Santander offers American Express cards. American Express also has partnerships with other companies to encourage consumers to apply for its credit cards. Two examples are its co-branded cards with Delta Air Lines, which allow consumers to earn frequent flier miles redeemable on Delta, and its Hilton Hotels co-branded cards.

Pros and Cons of an American Express Card

What is Allowance For Credit Losses?

Allowance for credit losses is an estimate of the debt that a company is unlikely to recover. It is taken from the perspective of the selling company that extends credit to its buyers.

How Allowance For Credit Losses Works

Most businesses conduct transactions with each other on credit, meaning they do not have to pay cash at the time purchases from another entity is made. The credit results in an accounts receivable on the balance sheet of the selling company. Accounts receivable is recorded as a current asset and describes the amount that is due for providing services or goods.

One of the main risks of selling goods on credit is that not all payments are guaranteed to be collected. To factor in this possibility, companies create an allowance for credit losses entry.

Since current assets by definition are expected to turn to cash within one year, a company’s balance sheet could overstate its accounts receivable and, therefore, its working capital and shareholders’ equity if any part of its accounts receivable is not collectible.

The allowance for credit losses is an accounting technique that enables companies to take these anticipated losses into consideration in its financial statements to limit overstatement of potential income. To avoid an account overstatement, a company will estimate how much of its receivables it expects will be delinquent.

Recording Allowance For Credit Losses

Since a certain amount of credit losses can be anticipated, these expected losses are included in a balance sheet contra asset account. The line item can be called allowance for credit losses, allowance for uncollectible accounts, allowance for doubtful accounts, allowance for losses on customer financing receivables or provision for doubtful accounts.

Any increase to allowance for credit losses is also recorded in the income statement as bad debt expenses. Companies may have a bad debt reserve to offset credit losses.

Allowance For Credit Losses Method

A company can use statistical modeling such as default probability to determine its expected losses to delinquent and bad debt. The statistical calculations can utilize historical data from the business as well as from the industry as a whole. 

Companies regularly make changes to the allowance for credit losses entry to correlate with the current statistical modeling allowances. When accounting for allowance for credit losses, a company does not need to know specifically which customer will not pay, nor does it need to know the exact amount. An approximate amount that is uncollectible can be used.

In its 10-K filing covering the 2018 fiscal year, Boeing Co. (BA) explained how it calculates its allowance for credit losses. The manufacturer of airplanes, rotorcraft, rockets, satellites, and missiles said it reviews customer credit ratings, published historical credit default rates for different rating categories, and multiple third-party aircraft value publications every quarter to determine which customers might not pay up what they owe.

The company also disclosed that there are no guarantees that its estimates will be correct, adding that actual losses on receivables could easily be higher or lower than forecast. In 2018, Boeing’s allowance as a percentage of gross customer financing was 0.31%.

Example of Allowance For Credit Losses

Say a company has $40,000 worth of accounts receivable on September 30. It estimates 10% of its accounts receivable will be uncollected and proceeds to create a credit entry of 10% x $40,000 = $4,000 in allowance for credit losses. In order to adjust this balance, a debit entry will be made in the bad debts expense for $4,000.

Even though the accounts receivable is not due in September, the company still has to report credit losses of $4,000 as bad debts expense in its income statement for the month. If accounts receivable is $40,000 and allowance for credit losses is $4,000, the net amount reported on the balance sheet will be $36,000.

This same process is used by banks to report uncollectible payments from borrowers who default on their loan payments.

What Is the American Opportunity Tax Credit (AOTC)?

The American Opportunity Tax Credit (AOTC) is a tax credit for qualified education expenses associated with the first four years of a student’s postsecondary education. The maximum annual credit is $2,500 per eligible student. The student, someone claiming the student as a dependent, or a spouse making postsecondary education payments can claim the AOTC on their tax return.

Understanding the American Opportunity Tax Credit (AOTC)

With the AOTC, a household with a qualifying student can receive a maximum $2,500 tax credit per year for the first four years of higher education. Parents claiming a dependent child who is a full-time student ages 19 to 24 can claim an additional $500 Child Tax Credit.

The AOTC helps with educational costs such as tuition and other expenses related to a student’s coursework. Eligible students (or their parents) can claim 100% of the first $2,000 spent on school expenses and 25% of the next $2,000. This comes out to a maximum credit of $2,500: (100% × $2,000) + (25% × $2,000).

In general, tax credits are refundable, nonrefundable, or partially refundable. Up to $1,000 (40%) of the AOTC is refundable, making it a partially refundable tax credit. So, if the credit brings your tax liability to $0, you can receive 40% of your eligible credit (up to $1,000) as a refund.

AOTC Eligibility Requirements

Like other tax credits, you must meet specific eligibility requirements to claim the AOTC.

Who Can Claim the AOTC?

To claim the AOTC on your tax return, you must meet all three of these requirements:

• You pay qualified education expenses for higher education.
• You pay the education expenses for an eligible student.
• The eligible student is either you, your spouse, or a dependent whom you claim on your tax return.

Additionally, you must receive Internal Revenue Service (IRS) Form 1098-T to claim the credit. Here’s an example of a completed form:

Source: Internal Revenue Service

Which Students Qualify for the AOTC?

A student is eligible for the AOTC only if they meet certain requirements. Specifically, the student must:

• Be taking courses toward a degree or some other recognized education qualification
• Be enrolled at least part time for at least one academic period beginning in the tax year
• Not have finished the first four years of higher education at the beginning of the tax year
• Not have claimed the AOTC (or the former Hope credit) for more than four tax years
• Not have a felony drug conviction at the end of the tax year

Which Expenses Qualify for the AOTC?

For the purposes of the AOTC, qualified education expenses include tuition and some related costs required for attending an eligible educational institution. An eligible educational institution is any accredited public, nonprofit, or private college, university, vocational school, or other postsecondary educational institution. Related expenses include:

• Student activity fees paid to the school as a condition of enrollment or attendance
• Books, supplies, and equipment needed for classes, whether or not you buy them from the school

You can pay for qualified education expenses with student loans. However, you can’t claim the credit if you paid for expenses with scholarships, grants, employer-provided assistance, or funds from a 529 savings plan.

What Are the Income Limits for the AOTC?

To claim the full credit, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 if married filing jointly). The credit begins to phase out above these limits and disappears entirely if your MAGI is above $90,000 ($180,000 for married filing jointly).