A credit card company has classified its customers into the following types for

Question

A credit card company has classified its customers into the following types for customer profitability analysis:
1.Applies for credit card in response to a low introductory interest rate; transfers balance to new account, but when the low introductory rate expires, the customer transfers the balance to an account with a different credit card company that has offered a low introductory rate.
2. Charges a large dollar volume of purchases; pays balance in full and on time each month.
3. Carries a high balance; pays only the minimum required payment but pays regularly with occasional late payment.
4. Carries a high balance; pays at least the minimum required payment but does not pay in full and always pays on time.
5. Carries a low balance; pays at least the minimum required payment but does not pay in full and always pays on time.
6. Does not use the account but does not close the account.

The following facts pertain to the credit card company's operations:
Merchants pay the credit card company a percentage of the dollar sales on each credit card transaction.

Customers pay no interest on charges for purchases if the balance is paid in full and on time each month.

The credit card company charges a late fee if the customer's payment is late.

The credit card company incurs costs to send statements to inactive customers.

Required
Given the preceding information, which customer types would you expect to be the most desirable or profitable, the next most profitable, and so on for the credit card company on a long-term basis? Explain your ranking

Explanation / Answer

Disclaimer: This does depend on the relative values of the percentage merchants pay and the interest and late fees we charge, and what high and low actually mean so this is using typical values. The most profitable, hands down, is number three. We get the fat interest, the late fees, and the merchant percentage on new purchases. Next best for us is number four. We get the fat interest and merchant fees on new purchases. Number two is also good, we get our cut of a large sum every month. Number five is nothing to sneeze at, we get our fat interest on a small amount, but our fixed costs make this less attractive Number six is costing us our fixed costs Number one is costing us interest and our fixed costs, plus cost of opening and closing accounts. So, the rankings are 3, 4, 2, 5, 6, 1

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