Credit Risk Strategy

Probably the most common credit card business model is for customers to be charged a small annual fee in return for which they are able to make purchases using their card and to only pay for those purchases after some interest-free period – often up to 55 days.  At the end of this period, the customer can choose to pay the full amount outstanding (transactors) in which case no interest accrues or to pay down only a portion of the amount outstanding (revolvers) in which case interest charges do accrue.  Rather than charging its customer a usage fee, the card issuer also earns a secondary revenue stream by charging merchants a small commission on all purchases made in their stores by the issuer’s customers.

So, although credit cards are similar to other unsecured lending products in many ways, there enough important differences that are not catered for in the generic profit model for…

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