Credit limit management using action-effect models

Management (i.e. initial allocation and subsequent increase / decrease) of credit limits is one of the most critical decisions related to credit card accounts. It affects a number of variables that have direct or indirect influence on the profitability of the portfolio. This paper proposes the use of a new type of model (termed action-effect model) to study the effect of credit limit increase / decrease actions. Complex interactions between conflicting variables like credit risk, probability of attrition, credit limit utilization and revenue generated are studied. The possibility of using simulation along with action-effect models to arrive at an `optimum´ credit limit for each credit card account in a portfolio is discussed.