Interest on negative credit card balances
This is equal to the value of a loan multiplied by the interest rate. The interest rate is 10%. Negative credit card balances are 20% of the average amount paid via credit card.
When there is negative credit card balance, it means customer has overpaid the credit limit. And banks usually dont charge interest rate if we overpay. I am unable to understand the 10% interest rate and 20% of average amount paid. How did we arrive at those percentages ?
Hi Trishanan
I understand why the term negative balance can be confusing. However in the context of the case, it refers to ‘unpaid credit card dues’ on average per customer for the year. This ‘negative balance’ is on average 20% of the annual spend and constitutes a loan at 10% interest.
Do get in touch if you have further questions!
Trishanan,
I see you already received a clarification below.
Adding here another resource that might help you if you are currently working on case maths:
Best,
Cristian
My understanding (general understanding, not from the case) is that you would pay 10% on any loan within the credit limit. But would pay 20% for any ammounts above the credit limit.
Case von
Thanks for your query.
For part 1 of your query on interest rate, I agree it's conservative but it's part of the case information. However, in the interview your observations can fetch brownie points, so do make those remarks to the interviewer! :)
For part 2 of your query on avg. balance assumption, 20% is ballpark. In absence of any data provided to you, 10%/15%/20% would all seem reasonable. Though a substantially higher number might raise an eyebrow. The essential point though is that it would be similar for both the client and competitor as this number is an industry avg. Hence, you would arrive at a similar estimate for both in terms of avg. revenue per customer.
Do get in touch if you have further questions! :)