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the number of days in the billing period. No finance charge is imposed, however, if the beginning balance of the account was zero, or if the total of payments and credits on the account during the current billing period is equal to or greater than the beginning balance. Payments are applied t'i first to any unpaid finance charges and then to principal,

(5) Average Daily Balance Excluding Debits. Sometimes referred to as a "modified" average daily balance, this method provides for calculation of finance charges on the basis of an "average" daily balance which is computed by taking the sum of the daily unpaid balances--excluding current month's purchases from the unpaid balances--and dividing by the number of days in the billing cycle. Thus, the timing of the payment will affect the amount of finance charge--that is, the earlier payments are made on the account the

Tower will be the finance charge. Payments are applied first to any unpaid

finance charges and then to principal.

(6) True Actuarial Average Daily Balance. Under this method, customers will incur finance charges in any month in which there is purchase activity on the account, regardless of whether or not the account balance is zero at the beginning of the period or whether payments and credits equal or exceed the beginning balance. Finance charges are based on the "average" unpaid balance during the billing period, including all purchases, payments, and credits on the account during that period. It is determined by taking the sum of each day's unpaid balances and dividing by the number of days in the billing cycle. Payments are applied first to any unpaid finance charges

and then to principal.

Under all billing methods used in this study it was assumed that finance charges were imposed at the following rates: (1) on that part of the unpaid

balance between $33.33 and $500, 1 1/2% per month; (2) on that part of the unpaid balance in excess of $500, 1% per month; (3) on balances between $1

and $33.33, a minimum charge of $0.50 was imposed.

Characteristics of Account Usage

Much misunderstanding often exists with regard to what is typical of consumer use of revolving credit accounts. Sometimes there is a tendency to think of revolving credit in much the same way that one visualizes bank loan credit or other types of consumer credit plans.

Table 1 provides some summary statistics from actual account usage

which would seem to indicate a pattern in use of revolving credit which is

substantially different from many other types of consumer indebtedness.

Size of Balances.

The average outstanding monthly balance on accounts included in this study was $91.90; for one-half of the customers their average balance amounted to $37.27 (the median figure) or less. This is considerably smaller than is frequently imagined as being typical of revolving account indebtedness; and is much less than what is typically owed on bank charge plans, for example. The latter is said to be around $235 according to the Federal Reserve Board.

The largest balance maintained by any customer in this study was $741.26; only 10% of the accounts had average balances larger than $267. Finance Charges paid.

For some reason not entirely evident, consumers often seem to feel that revolving credit costs them most than other types of credit. Perhaps this feeling is a result of the fact that under revolving credit plans they receive statements every month, often with a finance charge thereon; whereas

TABLE 1
EMPIRICAL DATA CONCERNING SEARS REVOLVING CHARGE ACCOUNT USAGE IN TEXAS,

SELECTED SUMMARY STATISTICS, 865 ACCOUNTS

Item

Mean?

Median

2

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Average Outstanding Monthly Balance

Average Monthly Dollar Finance Charge, All Accounts 3
Average Monthly Dollar Finance Charge, Based Only

Ön Those Accounts Actually Paying Charges
Average Number of Months Finance Charge Incurred
Average Annual Percentage Rate Paid, All Accounts
Average Annual Percentage Rate Paid By Those Accounts

Who Paid A Finance Charge
Average Number of Sales Per Month, Per Account
Average Dollar Volume of Sales Per Month, Per Account
Average Number of Days Between Purchase Date

and Billing Date
Average Number of Days Between Billing Date

and Payment Date

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Notes: 1. An arithmetic average of monthly averages for all individual accounts.

2. The mid-point in a series of data, indicating that one-half of the

accounts had a value of this much or more and one-half had values of

this much or less.
3. Billing method actually used on the accounts sampled in this study

was the previous Balance. Finance charges were on the following
basis: on that part of the Previous Balance between $33.33 and $500,
the monthly rate of charge was 1 1/2%; on that part of the Previous
Balance in excess of $500, the monthly rate was 1%; on balances from

$1 to $33:33, a finance charge of $0.50 was assessed.
Source: Data taken from a twelve-month history of account records chosen at

random. Sample data included accounts from all parts of Texas.

on other types of credit plans, often they are not made aware of finance charges except at the time of signing the contract initially.

As can be observed from Table 1, these customers incurred an average monthly finance charge of $1.24 or $14.88 for the year. One-half of the accounts incurred finance charges of $0.31 a month or less ($3.72 a year).

In terms of an Annual Percentage Rage, the average rate paid by these customers amounted to 11.64%. This figure is based on all accounts, including

those which incurred no charge at all. If the calculations are confined to

only those customers who paid a finance charge, the average rate paid was

15.65%.

It should also be noted that generally these accounts did not incur finance charges every month. On the average, a charge was incurred a little

over 5 month out of the year.

Payment and Purchase Patterns.

As shown in Table 1, the average account experienced about a 31 day period of credit--with slightly more days (15.90) between purchase date and billing date than between billing date and payment date (14.77). On the average, there was approximately one purchase per billing period and total volume averaged around $20 per month.

Major Usage Patterns

Generally, it is possible to recognize three principal patterns of account

usage. First, there are those customers who never paid a finance charge during

the twelve-month period covered by the study. Approximately 26% of the accounts

were of this type. Second, are those accounts which always paid a finance

charge--about 25% of the total. Third, accounting for about 50% of the

total, are those customers who incurred a finance charge part of the time;

but in other months either did not purchase, or if they did, paid their account in full and thus avoided a finance charge (see Table 1).

An issue frequently arises concerning the impact of the so-called "free ride" which allegedly is obtained by those customers who pay in full thereby avoiding finance charges entirely. Analysis of the data provided by this study would seem to indicate that by far the majority of the revenue in finance charges comes from those customers who use their accounts the most

For example, those customers who never paid a finance charge (226 out of the 865) owed on the average a monthly balance of only $14.78. In total,

these customers accounted for only about 4% of the total balance activity

on all of the accounts studied. Of course, these customers did not contribute

any to the finance charge revenue of the store; and to that extent, they

did enjoy a "free ride."

On the other hand, those customers who always paid a finance charge (213 out of the 865) owed an average monthly balance of around $240; and,

in total, accounted for almost two-thirds of the total balance activity of all the accounts. This group incurred an average monthly finance charge of about $3.56 (as compared to $1.24 average for all accounts) and accounted for about 71% of the total finance charge revenue generated by the store.

Those customers who paid a finance charge only part of the time (426

out of the 865) accounted for approximately 31% of the total balance activity with an average unpaid balance of slightly under $59. They incurred an average monthly finance charge of about $0.75 and accounted for approximately 29% of the total finance charge revenue of the store.

Thus, there is, indeed, a "free ride" enjoyed by some customers; but those same customers actually account for an extremely small portion of the

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