Charge the interest rate on credit cards

Reference no: EM13695892

Because credit card companies and banks must charge the same interest rate on credit cards to all borrowers, there is an adverse selection problem with credit cards. How does a credit card company or firm know whether a person will be a high-quality borrower (i.e., one who pays the debts) or a lower-quality borrower (i.e., one who does not pay debts)?

Describe

a. how the restrictions of a single rate leads to an adverse selection problem, and

b. at least two potential means that credit card companies can use to try to lessen this problem.

Reference no: EM13695892

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