- Discussion board

I would like to know how are the numbers set at the time the bank decides to charge a credit card member. I would like to have a clear (and basic) example about:

1) How the floating rate is set and charged to a $1,000 monthly bill.

2) What is the benefit the bank has and if it has to repay this benefit to the credit card company.

3) What is the benefit for the bank of using the Rewards Actions (ie: air miles) in a credit card.

Thank you very much for your help.

Julian.

Julian,

The professionals who perform this kind of calculations are called "actuaries". Perhaps, you may want to learn more about this profession.

As to your question, the "floating rate" is usually calculated only once per billing cycle, using the value of the last month's PRIME RATE or a similar index.

The benefit for the bank in offering extras is very simple - it's marketing. They attract customers who otherwise wouldn't apply for this card. Of course, you have to spend quite a bit on your card in order to get a sizeable reward and banks know very well that a significant percentage of card-holders will start CARRYING a balance (thus, paying interest).

Many "airline mile" cards also carry an annual fee to protect the bank from too many customers who do not carry a balance and simply pay off the card in full each month.

It all makes sense from the business standpoint.

Good luck in your research