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From a list of active accounts as of December 12, 1971, having previously determined the first unit of the sample to be chosen by use of a table of random numbers, every fortieth account was selected, provided that the account met the necessary parameters. Those accounts excluded from the sample studies included any with the following characteristics:

(1) Accounts with less than a full year's activity. It was not necessary that the account have actual activity (that is, purchase or payment) during each of the twelve months studied, but it had to be open and subject to

usage by a resident of Texas.

(2) Accounts of customers who were not residents of Texas.

(3) Accounts which, at any time during the twelve-month period of study, were more than one month deliquent in payment. The decision to exclude "extreme past due" accounts was based on the desire to know what costs and

rates were involved when accounts were paid according to the agreement signed by the customer. Otherwise, it would not have been possible to evaluate the significance of the terms on the original agreement as they affect the buyer.

(4) Employee accounts were not included because of a difference in the

area of finance charge assessment.

This procedure produced account histories for a twelve-month period for a total of 865 accounts. These records came from all parts of the state-every town in which Sears had a "retai?" store (although some towns with "mail-order" outlets only were not included).

Data used in the study were copied by hand from original records on a month-to-month basis. All transactions on the account during the twelve

months were recorded, including the dates involved. A computer program for analysis of the data was prepared by Mr. Edward De Spain of Southern Methodist University in Dallas, Texas.

Major Objectives of the Analysis

As indicated earlier, the primary purpose of this study was to obtain

actual account history data for use in evaluating revolving account usage rather than to rely entirely on hypothetical examples. Of primary concern

were the following questions:

(1) What amount of finance charges in dollars and cents was actually incurred by the customers over the twelve-month period?

(2) What annual percentage rate of finance charge was actually paid

over this time?

(3) What was the actual yield to the store over the 12 months?
(4) How often were finance charges incurred?
(5) How many customers did not incur finance charges at all?

(6) What was the typical activity on the account--that is, size of balance, number of transactions per month, average amount of each purchase, number of days between purchase date and billing date, number of days between billing date and payment date, etc.

(7) What effect on the cost of the account over the 12 months did the use of a 60¢ minimum monthly charge have?

(8) What would have been the effect on dollar cost and annual percentage

rate paid if the monthly rate had been 1% instead of 1 1/2%?

(9) What would have been the dollar finance charges incurred under five other billing methods? (Other methods simulated were: Adjusted Balance,

Ending Balance, Average Daily Balance Including Debits, Average Daily Balance Excluding Debits, and True Actuarial Average Daily Balance.)

(10) What would have been the annual percentage rate paid under these

other billing methods?

(11) Wiacwould have been the impact on the revenue or yield of the store from the use of other billing methods?

Terms of the Revolving Account Agreement Studied Before analyzing the results of account usage, it is necessary to have an understanding of the terms of the agreement under which the accounts were

actually used. Pertinent terms in effect on the accounts studied were as

follows:

(1) Finance charges were assessed at a monthly percentage rate of 1 1/2% on that part of the unpaid balance between $33.33 and $500; 1% on

that part of the unpaid balance in excess of $500; on unpaid balances of $1

to $33.33, a minimum charge of $0.50 was assessed.

(2) Finance charges actually were assessed in accordance with the

"Previous Balance" method. That is, the finance charge was based on the balance owed on last month's billing statement (current month's beginning balance) without deducting payments or credits made on that balance subsequent to receipt of the statement and before adding current month's purchases.

(3) No finance charge was assessed if the customer paid his previous month's balance within 25 days of his billing date.

(4) The account agreement called for monthly payments of at least $10 to be made within 25 days of billing date.

A copy of the Sears Revolving Charge Agreement used in the state of Texas at the time of the study is illustrated below.

SEARS REVOLVING CHARGE ACCOUNT

AND SECURITY AGREEMENT

SEARS, ROEBUCK AND CO. in consideration of your selling merchandise and services for personal, family or household purposes to me on my Sears Revolv. ing Charge Account I agree to the following regarding all purchases made by me or on my Sears Revolving Criarge Account Identification. 1. I have the privilege of a Charge Account, in which case I will pay the full amount of all purchases within 30 days from the

date of each billing statement. 2. If I do not pay the full amount for all purchases within 30 days from the date of each billing statement, the following terms

shall be in effect
(A) I will pay the Deferred Payment Price for each item purchased consisting of:

(1) The cash sale price, and
(2) A FINANCE CHARGE, whith will be the greater of a minimum charge of 50¢ (applied to previous balances of

$1.00 through $33.00); or an amount determined by applying a periodic rate of 1.5% per month (ANNUAL PERCENTAGE RATE of 18% ) to the first $500.00 of "previous balance" and a periodic rate of 1% per month (ANNUAL PERCENTAGE RATE of 12% ) to any part of the "previous balance” in excess of $500.00. FINANCE CHARGE is based upon account activity during the billing period preceding the current billing period, and is computed upon the "previous bal ance" ("new balance outstanding at the end of the preceding

billing period) before deducting payments and credits or adding purchases made during the current billing period. (B) I will pay for all purchases in monthly, installments which will be computed according to the following schedule If The New The Scheduled

If The New

The Scheduled Balance is: Monthly Payment Will 3e: Balance is: Monthly Payment Will Be: $ .01 to $ 10.00

Balance
$300.01 to 350.00

$25.00
10.01 to 200.00

$10.00
350.01 to $400.00

30.00
200.01 to 250.00

15.00
400.01 to 450.00

35.00
250.01 to 300.00

20.00
450.01 to 500.00

40.00
Over $500.00

1/10 of New Bal. I will pay each monthly installment computed according to the schedule as stated above upon receipt of each statement. If i fail to pay any installment in full when due, you may, at your option, take back the merchandise or affirm the sale and hold me liable for the full balance on my account which shall be immediately due. Ownership of the merchandise purchased on this account shall remain in Sears until I have paid the purchase price in full. My installment payments shall be applied as follows in the case of items purchased on different dates, the first purchased shall be deemed first paid for; in the case of items purchased on the same date, the lowest priced shall be deemed first paid for, I have risk of loss or damage to merchandise. (C) You are to send me a statement each month which will show my previous balance last month's new balance), new balance,

scheduled payment, Finance Charge. purchases, payments and credits, and the amount of my monthly installment coming due. (D) I have the right to pay all or any portion of my account in advance. 3. You are authorized to investigate my credit record and report to proper persons and bureaus my performance of this agreement.

I understand that my Finance Charge and other credit terms will be based on my State of Residence. If !
change my State of Residence, I will notify you, and you will provide me with a new agreement containing

the Finance Charge and other credit terms applicable to my new State of Residence. NOTICE TO BUYER: (1) DO NOT SIGN THIS CONTRACT BEFORE YOU READ IT OR IF IT CONTAINS BLANKS. (2) YOU ARE ENTITLED TO A COPY OF THIS CONTRACT. KEEP IT TO PROTECT YOUR LEGAL RIGHTS. (3) YOU HAVE THE RIGHT TO PAY IN ADVANCE THE FULL AMOUNT DUE. 14421-006 (F11147-6 REV. 7.71)

96-687 O - 73 - 20

Definition of Terms

There are numerous types of billing methods used for calculating finance charges on revolving credit accounts. Because the terminology used in describing the various methods is often not uniform, it is necessary to define precisely the meanings of the billing methods as used in this study. They are as follows:

(1) Previous Balance. Also known as the "beginning balance" method, finance charges are calculated on the basis of the unpaid balance shown on the previous month's billing statement before deducting payments or credits made subsequent to receipt of statement and before adding current month's purchases. Payments made on the account are applied first to any unpaid finance charges and then to principal.

(2) Adjusted Balance. Finance charges are determined on the basis of the unpaid balance shown on the previous month's billing statement less payments and credits made during the current billing period, but before adding current month's purchases. Date of the payment or credit has no bearing on the amount of the finance charge assessed. Payments are applied first to any unpaid finance charges and then to principal.

(3) Ending Balance. Finance charges are based on the balance owed at the end of the current billing period, including all purchases and payments or credits occurring during the current month. Finance charges are applied first to any unpaid finance chages and then to principal.

(4) Average Daily Balance Including Debits. Finance charges are based on the "average" unpaid balance during the billing cycle, taking into account all purchases, payments, and credits on the account during the period. It is calculated by taking the sum of each day's unpaid balance and dividing by

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