System Dynamics - Credit Card

Foundations of Business


The credit card operation of the Smartchester County Bank has two conflicting goals: maximum issue of credit cards, and minimum unpaid bills. Accordingly the operation oscillates on a two-year cycle. In even years, the issue of new cards increases. In odd years, the quantity of unpaid bills increases, and this leads to tighter controls imposed on new cards issued. As a consequence of this, in even years the quantity of unpaid bills is reduced, and so the controls on new cards are relaxed.


Explain this phenomenon in terms of systems theory.

Draw a cause-effect diagram showing the feedback loops in the system.

What are the likely causes of the oscillation?

Discuss possible ways of damping the oscillation.

Hints and Further Information

"Borderline" customers may receive cards when the controls are relaxed, and may be denied cards when the controls are tightened.

There is a delay of several months between issuing a new card to a customer and discovering that this customer has not paid the bills.

Some banks are introducing the notion of dynamic delinquency, whereby they can analyse the spending and repayment patterns and pick up the early warning signs of a customer who may be getting into financial difficulties. Such banks may be able to take on borderline customers at reduced risk.

If the system can respond more quickly, this might reduce the amplitude of the oscillation, but it might simply increase the frequency (and turbulence) of the oscillation.

In this particular example, the cause-effect loops may be clearer if you think about ratios rather than absolute numbers. It is not the amount of bad debt that is the driver, but the ratio of bad debt to good debt.

Towards a Diagram

ICT Assignment

Outline the requirements for a management information system for Smartchester County Bank. What are the potential benefits of such a system?


Prepared by Richard Veryard & Aidan Ward.

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This page last updated on August 22nd, 2002
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