Reference no: EM132667298

For many years, Australian Express Company offered a charge card, called the Australian Express Card, which required its holders to pay off, in full, their card charges at the end of each monthly billing period. In other words, cardholders could not maintain outstanding unpaid balances like VISA bank credit cardholders could. Recently, however, Australian Express introduced a second card called the Optima Card, which was more like VISA credit cards in that Optima cardholders did not have to pay off all their unpaid balances. The interest rate charged by Australian Express was similar to other credit cards around 18%.

Problem 1: Assume that Australian Express Company cannot perfectly identify the credit risk of applicants for its two cards but takes equal care in checking card applicants for both cards. Would you expect the default rate on the Optima Card to be lower, equal to or higher than the Australian Express Card? Explain.