American Express ‘financial reviews’ send shudders down the spines of frequent flyers (and Amex cardholders) everywhere. But in my opinion they shouldn’t.

So I’m going to explain what a financial review is, what we know about what triggers a financial review, and why financial reviews don’t worry me a bit. Your opinion may differ on whether these are a big deal — and that’s fair — so hopefully this explanation helps you prepare in case you’re faced with one.

This past weekend at Frequent Traveler University I answered an audience question, and Frequent Miler offered by way of followup that I should highlight the risk of an American Express Financial Review as part of my answer. I did, because I agree it’s something that is helpful for cardholders to understand — even if it doesn’t worry me nearly as much as it does some.

What is an American Express financial review?

American Express wants to make sure you have the ability to pay back the credit they extend to you. So sometimes randomly, and sometimes triggered by your spending which seems ‘out of pattern’, they initiate a financial review.

They may suspend your ability to place charges on their cards either right away or after some period of time (if you haven’t cleared up the review quickly enough). You’ll get correspondence from American Express, but some people have found out about the review by logging into their online account or because a charge they tried to make was denied and they called American Express to enquire.

American Express will request documentation of you — about your income (possibly pay stubs or an IRS form that will give them access to a copy of your tax return) or possibly confirming your address — and they will give you a deadline to respond. Then they will evaluate based on what you’ve sent them if you have too much credit from them or not.

What triggers a financial review?

American Express tries to detect patterns that they think flag someone likely to be using up a lot of credit, either with them or with a whole bunch of credit cards, that could call into question the consumer’s ability to pay their bill. American Express doesn’t want to get left holding the bag if you can’t repay.

Sometimes they flag accounts randomly. It could also be because you’ve gotten several new cards, either with them or other issuers. Or because when they pull your credit they see you are maxing out those cards. All are potential signs you may be overextended.

So American Express wants to test your ability to repay the credit they are extending.

There are more reports of financial reviews on charge cards than on credit cards (they’ve already evaluated your ability to pay in the credit limit they’ve set with credit cards). But they do financial reviews on credit cards too. They’ll look at how much credit they’ve extended to you, how much total credit you have with other issuers, and how much money you can document that you make.

And they will either give you the all clear, adjust your credit line to a level they’re comfortable with, or close down your account entirely. In many cases where they close down an account it’s because you aren’t able to show them you actually make as much income as you listed on your application. Most people who are honest on their applications wind up getting through a financial review with their cards intact.

Big charges relative to your income call into question your ability to repay. Sometimes they’re big charges as a result of ‘manufactured spend’ (buying effectively cash instruments) and sometimes as a result of having big reimbursable expenses from work. They may not be as confident as you are that your employer will reimburse you quickly enough to pay them back on time; what they are interested in is your ability to repay and not your company’s.

Another big trigger for a financial review seems to be new accounts where there isn’t already a pattern established, combined with large transactions right away. That doesn’t always raise a flag, but it’s a common one.

There are lots of theories about what else triggers a review, and no one outside of American Express knows for sure. Often the specific activities that people report are associated with new cards, with a lot of spend, or spend out of pattern. Some examples of what some people think have triggered reviews include international spending and purchases of precious metals, using up most of your credit limit, frequently pre-paying your account in order to get more access to credit, taking large cash advances, buying a bunch of Amex gift cards, adding a bunch of authorized users to your account, and having a large credit limit (over $25,000).

What happens during a financial review?

A financial review can be annoying, since your cards can be frozen while they perform the review. They aren’t always good about getting the information about their pending review in advance. In most cases I’ve found American Express to have very good customer service, and I don’t know whether the common reports that people find out other than through the proactive communication by American Express is a rare customer service failing, or by design (they are worried about your ability to repay, so they ask for the financial review, they don’t want to give you the heads up perhaps and encourage you to spend a lot more on your cards before they shut you off?).

A financial review is, more or less, just income verification — just like you have to do for other lenders like car loans or mortgages.

As a result the most common thing that they request are your tax returns (they don’t want the copy from you, they want to get the copy straight from the IRS to ensure it’s genuine). They’ll usually request IRS form 4506-T which gives them access to a transcript of your return. I have heard one or two reports of a request for form 4506 which gets them an actual copy of your return at a cost to you of $57, currently. I’m not sure if that was simply something lost in translation (the lack of the -T) or something they do very occasionally. Sometimes they ask for your most recent pay stubs.

Their review could be for address verification. They want to be sure they really know where you live, so they can find you if you don’t pay. They may ask for utility bills in your name sent to your home address, or for bank statements with your address.

Some people find this process extremely intrusive, as I say I understand why they want the information and I provide it to other lenders so it doesn’t bother me, but it’s clearly the case that American Express makes your willingness to provide them with detailed financial information a condition of doing business with them, and when they flag you for a financial review it’s take it or leave it.

My own financial review experience

I haven’t ever had a financial review on my personal cards. I currently have personal charge cards (Platinum, Premier Rewards Gold) and credit cards (Starwood Preferred Guest, Hilton HHonors). In the past I’ve had Delta cards and the American Express Surpass Hilton card. I have business cards as well – a Business Platinum, and have had in the past had the Business Gold Rewards and Starwood Business card.

My business platinum card (for my real job) gets a financial review every year. They’ve actually been happy with audited financials or business tax returns that I provide, without getting them directly from the IRS.

After the first financial review they imposed a hard limit on the card — but it was several hundred thousand dollars. One time after a relatively ugly year on the financials they cut the limit in half. They’ve since raised it back up in subsequent years. Most of the time they’ve left the limit alone, though that’s probably my fault, they’ve asked how much credit I want and I’ve told them I was satisfied with what they were already extending.

I’m fairly surprised that I haven’t gotten a personal financial review: I have cedit limits from them that are much higher than the standard threshold folks worry about of $25,000 (the credit line has crept up over the past 13 years or so quite a bit). I have had big work expenses getting reimbursed. I’ve always paid my bill on time, but that’s not something that’s a get out of jail free card for financial reviews.

At some point their computers will probably flag me personally and I’ll have to verify my income for them. At that time they might well shrink my credit line a bit, but since I’ve been honest from the start about my income I’m not worried about getting fired as a customer.

Does it hurt you if American Express closes your account?

I often sense that most people posting big concerns about Amex financial reviews may not have been completely honest about their incomes when they applied, and they know that providing the requested information will cast them in an unfavorable light. But it’s not fair to dismiss every concern about verifying income this way.

It’s certainly possible that someone could have been honest about their income when they applied, then went back to school and now have a lower income (though likely will have a higher income later). It’s perfectly honest on the part of the consumer, but it’s still understandable that’s something American Express would want to know and consider when deciding how much credit to extend.

Let’s say your income is no longer as high as it was when you first applied for your American Express card, and once Amex sees the lower income you think they’ll close your card(s).

Some people won’t comply with the review request and instead of waiting for American Express to close their cards they proactively close their accounts themselves. Their goal is to avoid the accounts being reported to credit bureaus as “closed by issuer”

Most of the time that decision is based on a misperception that ‘closed by issuer’ hurts their credit score. It does not.

If a bank closes your card because you are delinquent on payments or in default on the card that’ll hurt your credit score — though there it’s the delinquency or default, not the closure, that hurts your score.

Losing available credit can increase your utilization rate — it reduces total available credit, so you’re using more of what you have, and that can bring down your score (this is independent of who initiates the closure).

And eventually, when the card ages off of your credit report in ten years, having closed the card can reduce the average age of your accounts (another reason independent of who initiates the closure).

Having an account closed by issuer does not hurt your FICO score. But it still doesn’t look good to anyone manually examining the report since they may assume the account was closed due to a problem or concern and they’re likely to have a concern themselves until they understand it better. (Relatively few requests for credit involve such a manual examination.)

My suggestion for most people is to just go ahead with the financial review, the worst case is generally account closure, so why bring that worst case on yourself? And even if your income has dropped markedly, they may just reduce their exposure to you by reducing your credit limit.

If American Express closes your account after a financial review, does that mean you’re banned for life?

If you close cards instead of proceeding with a financial review you can’t just ring up later to re-open the cards. When you close a card American Express will often expedite re-opening the account but not in this case, they will still want to put you through a financial review.

But if American Express closes your account that doesn’t mean you’re shut out for good, there are plenty of reports of successful new applications some time down the line. And sometimes those even go through with an instant approval. In all likelihood the triggers for the financial review (such as difficulty verifying an address, or lots of inquiries) were no longer present.

Give it some time, apply when you know your address is verifiable and you haven’t had a ton of other inquiries, and your score is high and you may be able to get an Amex card again.

Preparing for a financial review

The first piece of advice is actually quite simple, you can avoid the worst consequences of a financial review by being honest on your applications. That won’t prevent a review, but unless your financial situation has deteriorated substantially since the time you applied it will almost always keep your account from getting cancelled.

You should also have another credit card, from another issuer. Don’t carry just American Express. That way if Amex puts a temporary hold on your ability to charge as a result of the review you won’t be shut out. It could happen while you’re traveling abroad or when you have extremely important bills to pay by card right away. So having a backup is useful. And that’s not just true for American Express cards, it’s true for any card since other issuers have their own processes – it’s just that American Express has been aggressive and well-known for theirs.

If you do believe your account will get cancelled, because the income on your tax returns is much lower than the amount you had told Amex you made when you applied — or if you are not going to comply with the financial review — and if you have a Membership Rewards-earning Amex card, then you probably want to transfer out those Membership Rewards points before submitting documents for the financial review or letting the time period for doing so lapse. That way you won’t risk losing your points.

Finally, don’t sweat it. You are asking them to take the risk that you’ll repay, and if you want to do business with them they are going to want to assure themselves of your ability to actually repay. If you’re not comfortable with that, there are certainly other issuers who may not ask for the same level of personal information.