The object of legislation should be, in my opinion, to promote and assure competition and to assure that consumers are adequately informed as to the type of billing method in use by the store. The existing Truth in Lending Law has provisions which can, if enforced, accomplish this end. It has been noted by some that if all companies were to use the same billing method, comparison of costs between different firms would be possible. Even if the billing method were the same, however, it still would not be possible to predict in advance what the actual cost (in dollars or as a rate) of credit would be on revolving accounts. This is true because of the fact that repayment terms differ from store to store and because the actual rate of charge paid by the customer is largely a result of his individual purchase and payment patterns.

Impact of Fifty-Cent Minimum on Dollar Cost

Another area of interest in undertaking this study was the question concerning the impact of a fifty-cent minimum charge on the cost of credit to customers. Various critics have often condemned this practice and have given examples of this practice producing rates of 60% or more. Again, the examples provided have been largely conjectures.

In an attempt to measure the actual cost differences to customers, a simulation of a program whereby finance charges were assessed at the same rates except without the imposition of a $0.50 charge on balances of less than $33.33 was conducted on the sample data in this study.

Table 9 contains the result of this simulation. Under most billing methods use of the minimum charge amounts to a difference of only $0.01 or $0.02 a month. The impact of the minimum is greatest under use of the True Actuarial Average Daily Balance.

TABLE 9

EFFECT OF FIFTY-CENT MINIMUM CHARGE ON AVERAGE MONTHLY DOLLAR
FINANCE CHARGES, SIX DIFFERENT BILLING METHODS
(1 1/2% per month on first $500; 1% on excess)

Notes: 1. Arithmetic average of monthly averages for all individual accounts. 2. The mid-point value in a series.

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

For whatever the reason, the impact on cost to the individual customer from use of the minimum is in most instances practically nothing. It may be that the poosibility of incurring a $0.50 charge actually encourages customers to pay in full their balances when they are very small thereby saving them some finance charges they might otherwise incur. In any event, this does not seem to be a significant factor from a consumer point of view.

FInal Thoughts

Finally, I would like to urge the Subcommittee to concentrate on other areas covered by S. 914 such as correction of billing errors and assuring prompt crediting of payments where a more urgent need may be said to exist. It would seem to me that it is not at all certain that Sections 167 and 168 will actually provide any real benefit for consumers; and may actually on balance prove to be harmful to the extent that competition is lessened and credit revenues reduced to the point that cash buyers are forced to bear an increased share of credit costs or if a lessening in the availability of credit should occur.

Basically, my position is similar to that recommended by the National Commission on Consumer Finance. In their report, they recommend treatment of purchases and payments alike within a given billing period and that credit be given for merchandise returned before determining the balance on which finance charges are to be based. With those exceptions, the Commission recommended leaving open as many options on billing methods as possible.

One final observation made by the Commission which I have not mentioned to this point, but with which I agree, is that many small retailers might find mandatory use of some type of Average Daily Balance system prohibitive either financially or mechanistically. The result could be a shift to bank charge plans, thus lessening competition and providing both the customer and the merchant with a restricted choice--clearly not a desirable occurrence.

AVERAGE AVERAGE TRUE
DAILY
DAILY ACTUARIAL
BALANCE BALANCE AVERAGE
INCLUDING EXCLUDING DAILY
DEBITS BALANCE

DEBITS

I would like to express my thanks for your invitation to
testify about my research on May 24. I think it shed some light
on the issues at hand, although it made clear the need for a
comprehensive look at the subsidy issue, looking not only at
the subsidy that exists among families that use credit, but also
the potential subsidy from cash buyers to credit users. The
New York study I mentioned in my testimony is a step in this
direction. I have enclosed a copy of the questionnaire being
used. I think you'll find it interesting, especially page 3.
Our response rate is already up to 50 per cent.

The principle that everyone should pay the cost of services
they use and that we should do what we can to increase the effec-
tiveness of competition cannot be questioned as being desirable.
But when this can be accomplished only at a cost, we must attempt
to see if the price to be paid is worth the gain. My analysis
showed that revenue reducing regulatory changes like (1) a re-
duction in the rate maximum, (ii) a fixed billing method when
the rate is also fixed or (iii) an elimination of 50¢ minimums
would likely have a larger than proportionate impact on the lower
income consumers who will (a) end up with less and/or more ex-
pensive credit and (b) pay higher cash prices for the goods &
services they buy.

True, many "consumer" groups approve of these changes, but groups like the unions that support a 12% ceiling have relatively high incomes and would indeed benefit, likely at the expense of other consumers. It is this "distributional" impact that I feel is very important, for it is basically an issue of the equity of a change that worsens the lower income groups position, whether cash buyer or credit user.