Sunday, February 27, 2011

Annual Percentage Rate and Initial Credit line

If you are in a Credit card division of a bank, you might have heard of APR and ICL. These are the two most important characteristics of a credit card apart from the fees. A bank's strategy has to strike a trade off with both these metrics. A higher initial credit line is always good as the spender might spend more due to more liquidity.

However, when we think on the basis of incremental profit, we might be able to arrive at an optimum ICL based on the customer's risk profile. APR also is extremely important. With higher APR, the bank makes more money, however the spending of the customer might reduce. It is important hence to get an efficient frontier for these before coming with the strategy. Also with the new CARD act, the change in APR is not as flexible as it was before.

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