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Most banks that issue credit cards charge interest rates on credit car

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Re: Most banks that issue credit cards charge interest rates on credit car  [#permalink]

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New post 27 Sep 2019, 23:11
chetan2u wrote:
Adi93 wrote:
Hi chetan2u

Please help in answering this. I went with C.

hazelnut wrote:
GMAT® Official Guide Verbal Review 2019

Practice Question
Question No.: SC
Online test bank question number : CR00677

Most banks that issue credit cards charge interest rates on credit card debt that are ten percentage points higher than the rates those banks charge for ordinary consumer loans. These banks’ representatives claim the difference is fully justified, since it simply covers the difference between the costs to these banks associated with credit card debt and those associated with consumer loans.

Which of the following, if true, most seriously calls into question the reasoning offered by the banks’ representatives?

(A) Some lenders that are not banks offer consumer loans at interest rates that are even higher than most banks charge on credit card debt.

(B) Most car rental companies require that their customers provide signed credit card charge slips or security deposits.

(C) Two to three percent of the selling price of every item bought with a given credit card goes to the bank that issued that credit card.

(D) Most people need not use credit cards to buy everyday necessities, but could buy those necessities with cash or pay by check.

(E) People who pay their credit card bills in full each month usually pay no interest on the amounts they charge.



Hi Adi93,
It is clear cut C...

The question is about the difference in the rates of interest rates that banks charge on credit card debt and loans..
The official claims it is because of the associated costs that are incurred on the two..

All except C are nowhere close..

C tells us that apart from the costs involved, there is a certain amount the banks get from the shops using the card which is almost 2-3 %, much more than the difference in interest of 10 basis point or 0.1% between the two..
Not required to know the basis points but the choice clearly gives a way these banks are earning on the use of credit card.

Since few have taken E as the answer..
It is out of context and at best agrees with official so opposite of what we are looking for..
So if there are a lot of people not paying any interest on the amount used, these interest too has to be recovered from late payers or credit card debt..
Thus justified in a way for extra 10 basis points...

Clear answer C


Hello chetan2u Bunuel

I am still a bit confused. Could you please help me find the flaw in my reasoning.

For option C 2-3% is charged for every transaction done on CC.
Lets take 2 cases 1) We borrow 100 from bank (Loan) 2) We take a CC from the bank with limit of 100
According to the premise, Rate of CC is 10% percentage point higher.
So if Rate of Loan is 10%, Rate of CC will be 20%

The bank will get back 110 through the loan and 120 through CC.

Now we take the case where the bank doesnt change the extra 10% on CC and rather just takes 2-3% of every transaction that is made.
So the value that the bank should get back is => 100+10(interest) + 3(From transactions, considering the entire 100 from CC with spent) = 113
Still the 113 is less than 120 and doesnt make up for the cost

Also E could you explain again why E is wrong
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Re: Most banks that issue credit cards charge interest rates on credit car  [#permalink]

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New post 23 Oct 2019, 11:11
Ambigous question. If you have some business background its really hard to arrive at c) as a viable solution.
If you dont have a clue about business and cost structures in general you would press c) at first sight though.

Stem tells us something about the cost structure between consumer loans and credit card loans, answer choice tells us that banks can charge up to 2-3% on CC purchases.

Nowhere does this let us compare costs of credit card with costs of normal loans.

This is just out of the scope to me
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Re: Most banks that issue credit cards charge interest rates on credit car   [#permalink] 23 Oct 2019, 11:11

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