Modeling the Combined Effects of Credit Limit Management and Pricing Actions on Profitability of Credit Card Operations

The profitability of any credit card portfolio is influenced by complex interactions between several conflicting factors like credit risk, probability of attrition, propensity to revolve, credit limit utilization and revenue generated. In this context, the allocation and maintenance of appropriate credit limits, and optimum pricing are the most critical parameters, as they affect a number of these factors. Going beyond previously reported work dealing with pricing and revenue optimization, and credit limit management in isolation, this paper proposes a method of studying the combined effects of credit limit management, and pricing actions on profitability using a system of empirical behavioral models for the individual factors; and discusses how simulation can be used to arrive at ‘optimum’ pricing and credit limit combinations for each credit card account in a portfolio.