Question:
Because credit card companies and banks must charge the same interest rate on credit cards to all borrowers, there is an adverse selection problem with credit cards. How does a credit card company or firm know whether a person will be a high-quality borrower (i.e., one who pays the debts) or a lower-quality borrower (i.e., one who does not pay debts)?
Describe
a. How the restrictions of a single rate leads to an adverse selection problem, and
b. At least two potential means that credit card companies can use to try to lessen this problem