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

Question

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.

ID: 500229

Argument Evaluation

Situation

Banks that issue credit cards tend to charge interest rates on the associated debt that are ten percentage points higher than the rates associated with “ordinary” consumer loans (consumer loans that are not associated with credit cards). Representatives of these banks have offered a justification of this practice, based on a claim that this difference in interest rates “simply covers the difference” in costs, to the banks, associated with these respective types of loans (loans associated with credit cards and consumer loans that are not associated with credit cards).

Reasoning

What additional facts would indicate a flaw in the bank representatives’ argument?  Given the description of the bank representatives’ argument, we may assume that, by their estimation, the costs to banks associated with credit card debt are greater than the costs associated with other consumer loans. The representatives’ argument, that the difference in interest rates “simply covers” this difference in costs, may then be seen as an argument that all of the extra money that the banks collect from the higher interest rates is necessary if the banks are to cover this difference in costs. If we can find a fact whereby the ten percentage point difference is not necessary to cover the difference in costs, then we may be able to “call into question” the bank representatives’ argument.

A. The point of this response to the bank representatives’ argument would seem to be that the relatively high interest rates on credit debt may be justified because certain other businesses charge even higher interest rates on consumer loans. Regardless of the merits of this response, it appears intended to support the argument of the representatives, whereas our task is to identify a fact that could be used to criticize the argument.

B. This purported fact does not address the argument concerning the interest rates on credit-card debt.

C. Correct . If two to three percent of the value of purchases made on credit cards goes to the issuing banks, then this money could be used to cover some of the difference in costs described by the bank representatives. The interest rates on credit cards could therefore be somewhat lower than they actually are, with the difference in costs nevertheless still fully covered. The difference in interest rates of ten percentage points may therefore not be necessary.

D. This point might be used in support of an argument that consumers have a genuine choice as to whether to use credit cards, and that they are therefore responsible for the higher rates of interest that they pay for credit-card debt. Such an argument would seem to support the position of bank representatives.

E. As with the point in option D, this point might seem to suggest that consumers bear some of the responsibility for the higher interest rates they pay, thus perhaps mitigating the responsibility of the banks. The point might thus seem to support the position of the banks’ representatives.

The correct answer is C.

Heisenberg12 · Accepted Answer

Premise: The interest rates on credit card charges are 10 percentage points higher than those on consumer loans. 
Banks’ representatives: “These high rates are justified.” 
Reasoning given by Banks’ representatives: “this difference in interest rates only covers the costs associated with credit cards.

We have to attack this reasoning and prove that the this move is not justified.

Pre-thinking: 
What could make us believe that these higher interest rates are not justified? Something that says there are ways other than increasing interest rates in which the banks can cover their costs.

Option C shows an alternate way in which the banks can cover their costs (fully or partially) apart from increasing the interest rates by 10 percentage points.

Posted from my mobile device

KarishmaB · Answer

Bank Rep: The 10 percentage points higher rate is justified since it covers the difference between the costs of credit card debt vs consumer loans.

To doubt the reasoning, we need to find why the higher rate may not be justified.

We are given that 10 percentage points is the diff between the costs of credit card debt vs consumer loans. But the 10 percentage points higher rate may not be justified since the bank earns other income from credit card i.e. 2-3% of selling price of every item. 
(C) doesn't question whether the extra cost of credit card debt is 10 percentage points. It questions whether it is justified to retrieve the entire 10 percentage points cost difference through higher interest. Since credit card does offer extra revenue, it calls into question the justification of directly charging 10 percentage points extra.

chetan2u · Answer

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

Shivikaa04 · Answer

I don't understand the logic behind C

LauraOrion · Answer

Hey  Shivikaa04  --

The key here is to look directly at the conclusion that the banks reach - the reason that they charge the increased interest is simply to account for the difference in what it costs them to carry that debt. There are a couple gaps in this logic, but the most obvious is this: what if the bank isn't just making money from the difference in interest rates - what if they have some other revenue from offering credit cards? C fits that perfectly -- If the bank is already making 2 - 3% off every purchase (which they wouldn't make off another purchase), then they are already seriously offsetting the risk that they're carrying. It doesn't destroy the argument, but it does call into question the idea that charging high interest rates is the only way for them to recoup their costs, especially since not all credit card users are going to be carrying debt from month to month.

GMATYoda · Answer

Dear Shivikaa04 Happy to help you on this, The bank representative's 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. Premises: 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 Hence in order to weaken this claim by the bank's representatives we need to show that there are other sources from which the difference between the costs may be covered. You basically need to weaken the bank's representatives claim. Absolutely out of scope. In first we aren't concerned what other lenders, who aren't bank, do. Second certainly shows the value that credit card holds in the eyes of people as ready money, but has nothing to do with the bank representative's claim. If 2 or 3 percent of selling price of every item bought with a given credit card goes to the bank that issued that credit card. Then this clearly shows that bank representative make false claim about covering the cost of credit card debt. In such a case even if they keep the same interest rate of credit card debt and ordinary consumer loan debt, still they would end up earning an incentives on credit card debt through sales people make using the credit card. Great then do use the cash, who stops you. Banks don't care for you guys. But banks won't stop either to call you and bug you for getting a credit card issued.

Out of scope. This rather strengthen the argument that bank representative's make. If people use the credit card free of cost, then how do banks cover the operational costs of credit card as a financial product offered by banks..

Xue · Answer

I think C is denying what the banks’ representative said.
The given passage said that the 10% only covers the cost. I thought it is not ok to weaken the statement by saying “no, it’s not 10%, it’s 7%”. I thought we have to accept the given passages as truth

Posted from my mobile device

sham264 · Answer

Hi  KarishmaB ,
Can we not say that extra 2-3%, which the bank is getting on sale of every item could just be a part of its efforts to offset the extra costs and if this 2-3% wasn't there then 10% extra interest could have been even higher. Or-
 2-3% from sales + 10% extra interest = Cost to bank for Credit Card - Cost to bank for consumer loans

KarishmaB · Answer

sham264

This is what the argument says:

representatives claim - it simply covers the difference between the costs to these banks associated with credit card debt and those associated with consumer loans.

The rep is claiming that 10% is the cost diff and it just makes up for it. (SO we cannot say that 10% + 2/3% is the cost difference) We need to weaken it. We do that by saying that there are other things making up for the cost difference too. So why charge 10%?
Also, as long as it casts doubt on our conclusion, we are good. The rep can justify it later in whatever manner, we don't care. We just need to cast doubt as per info given to us.

Rasalghul853 · Answer

Can somebody please explain why option E is incorrect. IMO it perfectly weakens the conclusion saying that customers who pay on time don't have to pay the extra interest amount. in other words, there is no extra cost of debt for the credit cards. Really confused.

Thanks in advance

Thanks in advance

MartyTargetTestPrep · Answer

Notice that customers who pay off the cards do not have debt. So, all (E) communicates is that banks do not charge interest to customers without debt.

The fact that banks do not charge customers without debt does not weaken the argument about the high rates charged to customers who do have debt.

Furthermore, the argument is that the high rates charged by banks are justified. The fact that certain customers do not pay any interest does not indicate that the interest rates charged by the banks are not justified.

Fido10 · Answer

KarishmaB , Thank you so much for this explanation.
However, having the possibility to draw a revenue from the credit cards, does not eliminate the possibility that these credit cards could still lead to costs, and then the solution the executives provide could still be hold. Can you please correct me

KarishmaB · Answer

Fido10  
CR weaken questions are about weakening the probability of the conclusion being true. They do not need to establish that the conclusion is false.

Considering that the rep says that the difference is justified because 10% just covers the difference in the debt rates, we could weaken it by saying that the company is earning other revenue too from the credit card. So 10% difference is not justified (as in, the company is recovering the difference in debt rates through other sources too). Now the rep could add other new information again to justify his stance even further but that is beyond our scope. We just need to weaken the argument as given.

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

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

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