total business activity done by the store. A majority of the finance charge revenue is paid by those customers who account for the vast majority of the total purchase activity. Therefore, it would seem that the impact of the so-called "free ride" is substantially less than generally imagined.

Impact of Billing Method on Dollar Cost to Customer

It has been generally assumed that choice of billing method produces a substantial difference in dollar amounts of finance charges. As indicated earlier, however, almost all evidence offered as to such differences has been based on theoretical conjecture of various possibilities rather than on empirical data. Part of the problem, of course, centers around what one might consider to be "substantial."

Accordingly, one of the main objectives of this study was to study actual account histories over a period of time in order to measure empirically the impact of various billing methods on the dollar cost of credit to the customer. Analysis of actual data produred the following monthly average dollar finance charges for the various methods:

Tables 2 and 3 and Chart I illustrate the magnitude of the differences in dollar finance charges resulting from use of various billing methods. For example, the Previous Balance method on the average cost $0.15 a month ($1.80 a year) more than the Adjusted Balance. For one-half the customers, the Previous Balance method differed in cost from the Adjusted Balance by $0.06 a month or less (see median, Table 3).

Further analysis of the data in Tables 2 and 3 indicate that the Previous Balance method on the average cost no more than one form of Average Daily Balance (Including Debits) and actually was less expensive than a True Actuarial Average Daily Balance to the extent of $0.23 a month. Likewise, use of the Ending Balance method produced a greater cost ($0.17 a month average) to the customer than did use of the Previous Balance method. One other method--Average Daily Balance Excluding Debits--produced a smaller finance charge than Previous Balance by an amount equal to $0.06 a month on the average.

Detailed Analysis of Monthly Differences

In Dollar Finance Charges

Tables 4 through 7 provide a more detailed analysis of the monthly dollar differences in finance charges between Previous Balance and other billing methods.

Previous Balance vs. Adjusted Balance.

As indicated earlier, the average difference in cost between Previous Balance and Adjusted Balance amounted to a relatively modest $0.15 a month or less than $2 a year. For some customers, of course, the difference would be either more or less than that average difference.

Billing
Method

TABLE 2

DIFFERENCES IN AVERAGE MONTHLY DOLLAR FINANCE CHARGES,
SIX BILLING METHODS, 865 ACCOUNTS

(Based on Mean Figures)

Billing
Method

Average Daily Balance
Including Debits

Average Daily Balance
Excluding Debits

True Actuarial Average
Daily Balance

Source: Data taken from a twelve-month account history of records from 865 accounts.

Billing
Method

TABLE 3

DIFFERENCES IN AVERAGE MONTHLY DOLLAR FINANCE CHARGES,
SIX BILLING METHODS, 865 ACCOUNTS

Source: Data taken from a twelve-month account history of records from 865 accounts.

TABLE 4

DIFFERENCES IN AVERAGE MONTHLY DOLLAR FINANCE CHARGES, PREVIOUS BALANCE AS COMPARED TO ADJUSTED BALANCE

Note: 1. When the amount of the difference is a positive value, this indicates that the Previous Balance method is the greater of the two.

Source: Data taken from a twelve-month history of account records on 865 accounts chosen at random.