Because the credit card company cannot do this, it must find a price point that will allow it to generate a profit commensurate with the risk it undertakes. The problem is that consumers with good credit may find these rates unpalatable if they know their own worth in the credit markets. Good consumers may therefore avoid the credit card companies, leaving only the bad consumers. The rate decision made by the card company is adverse because it is not pricing according to market conditions, a function of its asymmetrical information. This costs it customers it would otherwise want to have.
Credit card companies can try to lessen...
The first is that the company can offer different rates based on credit scores, or based on past credit history. This buys the company time to gain more information about each customer to enticing all customers with attractive rates and then increasing rates for those with higher risk. Another means by which credit card companies can address asymmetric information by acquiring more information about the customer -- perhaps seeking greater access to the customer's financial records or past payment history. This would reduce the degree to which the credit card company's information is asymmetric.
