I am unable to understand this revenue stream for VISO

Question

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 ?

Answer 1

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!

Answer 2

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:

Cheatsheet: The Must-Know Consulting Terms for Interviews

Best,

Cristian

Answer 3

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.

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