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Table 6-10

Method of Payment of Outstanding Balance on Store Cards
(percentage distribution of families using store credit cards)

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Mr. MANDELL. My book refers to bank credit cards. While essentially half the families pay in full and half do not always pay in full—this regards bank credit cards—of those with incomes of over $15,000, 64 percent always pay in full and of those with incomes under $10,000 only 46 pay in full.

So there is a differential over there with regard to that. With regard to store cards, again 65 percent of those with incomes of $15,000 and over always pay their bills in full; those with incomes of under $10,000 only 50 percent pay their bills in full.

There are other tables, also, and I will be glad to turn them in.

Senator PROXMIRE. Let me go to that truth-in-lending question I asked you when I interrupted you. You said there had been some improvement, but it was so slight you might regard it as negligible. There was an indication of 46 percent I think before the truth-inlending who had an accurate or roughly accurate estimate of the amount of interest they paid when they bought automobiles.

Mr. MANDELL. I am sorry to interrupt, sir, but the 46 percent didn't really apply. The proportion who estimated within 10 percent of the true charge was smaller than that. On the average the mean of what was estimated to what was actually true was 46 percent.

On the average, people thought they were paying only half of what they were.

Senator PROXMIRE. That increased to 54?
Mr. MANDELL. 53 percent, yes.

Senator PROXMIRE. Now, did you question people who had just bought a car so that you

Mr. MANDELL. Yes. People who had made a purchase. In the latter case they were people who had made a purchase within the past 6 to 9 months.

Senator PROXMIRE. So in every case they would have under the law at least been notified of what the interest charge was.

Mr. MANDELL. Yes, sir.
Senator PROXMIRE. How do you explain that?

Mr. MANDELL. Well, I have an interesting story to relate. I basically explain it in the sense that people do not know what an annual percent rate of interest is. I believe a large proportion of the people in this country cannot accurately compute a percentage at all. It is a very, very tricky business.

Many of my friends who have Ph. D.'s in economics, when you ask what 6 percent per $100 per year would be would say 6 percent. I think that to a great extent ignorance of credit is pervasive. It is a very, very technical subject that people prefer to ignore because they cannot figure it out. No one has made an effort to inform them of this.

I attempted, after my results came in—I spoke to people at the FTC and elsewhere and I said that in my estimation the truth-in-lending was kind of a sham because it really didn't help the people. People were ignorant of the rates. If they were told what it was it would go in one ear and out the other.

In this regard, after I had done my study, I was giving a speech to a committee of installment bankers in Michigan and I related this story and one of them came up to me afterward, “The truth-in-lending law has been the greatest boon to our profession.”

I was rather surprised because this man was an installment lender. I asked him how and he said:

Before the truth-in-lending law the people came in and we told them what it would be and they would be rather unsure, but we—we really opposed it because we knew if we told them that you are paying 16 percent per year the consumer would say, “I am not going to pay that.” It worked in reverse. The customer would come in and be unsure about whether they would want the loan and I would say “The truth-in-lending law requires me to tell you that you must pay 16 percent per year" and he says invariably, "Well, gee, if that is the truth and that is the law, I can't do any better than that." I'll take it.

It is this kind of perverse effect that the truth-in-lending law has had that has really worries me.

I tend to feel that if the Government were sincere about helping the consumer

Senator PROXMIRE. Are you sure you phrased that the way he phrased it if truth-in-lending laws—the truth-in-lending law requires you to pay 16 percent; is that what he said?

Mr. MANDELL. No. No. He stated it legitimately. He said the truthin-lending law requires that I tell you that you are paying 16 percent per year.

Senator PROXMIRE. That is quite a difference.
Mr. MANDELL. Yes.

Senator PROXMIRE. What do you suggest can be done to improve that? You talk about it very briefly and generally, about the parental role for the Government. But what can we do to make people understand?

Mr. MANDELL. I think it is an unequal fight. I think the free enterprise system can do very well under the assumptions which tend to underlie it. That is that both buyer and seller have a perfect understanding of the marketplace and of their transaction.

I found in my studies that the buyer does not have anywhere approaching a perfect understanding of it. I think, for example, that some investment by the Government in spot advertisements, for example, utilizing the mass media to explain exactly what the percent rate is, and explain the fact that there are more than one lender available, to explain that credit unions and banks are a source of funds at a lesser rate. Equipped with the knowledge of dollars, people are not equipped to do battle in the credit marketplace.

Senator PROXMIRE. And yet we have worked with percent for so many years, for so many generations and you are taught in the sixth grade in school—we 'have a majority of our people graduating from high school now, so we have a greater percentage of the people who are educated—shouldn't that allow the people to approach this right?

You say the banks seem to compete in advertising as to what your return is.

Mr. MANDELL. I think that may be the cause of the difficulty, sir. At least it was in earlier studies by others at the survey research center in that people understand what a bank pays, that a bank pays 4, 5 or 6 percent. Therefore, for a long time the most prevalent answer given to any type of loan would be 6 percent because people would feel that if the bank paid them 6 percent, then the bank must be charging 6 percent for their money.

There is no understanding whatsoever on the part of the publicnot a great understanding anyway-of the mechanism involved.

In another study I did we asked people what accounts for the charges. First of all, whether the stores make 18 percent or whether there were costs. Some people thought it was total profit. Some people thought there was costs.

When we asked for the costs most people could think only of administrative cost. They knew there were costs connected with putting a stamp on a letter to bill them each month for charges. I think fewer than one-fifth of the people saw there was a risk involved with credit, with the lender granting credit to the borrower and only 3 percent mentioned the cost of money that is involved.

Now, while this may appear to be only of academic interest, I think it is rather important in the shopping function. I think a person should be equipped with a knowledge of the rate of interest.

Senator PROXMIRE. Let me interrupt to say I wonder—it is so hard to know-how that question was asked?

It would seem to me the first reaction would be cost of money; the second would be risk; and the last reaction, emphasized the most was that the consumer never recognizes the great cost involved in interest.

Mr. MANDELL. I think that is true.

Senator PROXMIRE. The reason you have these differences is not by and large risk or cost of money, which is fairly uniform, but the enormous difference in cost.

When you have a small transaction, and you have to bill the debtor over a period of time, the cost can be far, far greater for one transaction than for another.

Mr. MANDELL. Right.

Senator PROXMIRE. This is the element that they felt people wouldn't understand. This is the reason for the fact that in some cases you have a cost actually being at 24 percent, and in another case 7 percent.

Mr. MANDELL. But I think a person should know the rate of interest even if it is not meaningful to him directly simply for purposes of shopping around.

If people understood that one of the costs of money was the risk they could situate themselves in the array of creditors in the market taking cognizance of their own risk.

If a person has a decent job and he has always paid his bills on time, he should perhaps realize that 18 percent is a lot of interest for him to pay for a major loan. If he is willing to buy a color television set, perhaps he could do better than charging it to his charge card at the store and paying a little bit at a time.

Perhaps if he knew where he stood in the marketplace, he would seek out lower cost lenders.

Senator PROXMIRE. Of course, in many cases people who do that will have money of their own in a savings account getting 412 percent and they will go out, as you say, and borrow at 18 percent to buy something and there is a psychological or psychic matter there. Maybe they are right. Maybe they feel better. After all, they should know, though, and understand what is happening:

Could you comment on the use of minimum finance charges?

I have argued these charges are often imposed on lower income consumers and are therefore unfair. Would you agree?

Mr. MANDELL. I don't claim to have I have not studied the matter seriously.

Are you referring to the fact that there is a minimum finance charge assessed each month for individuals which can be greater than the effective rate of interest for that month?

Senator PROXMIRE. Yes, it can be charged on a time basis or on the size of the purchase. Often a 50-cent minimum charge. If you

have a low balance, it could be a big percentage. Mr. MANDELL. I must defer to the legal experts in that question. I think that if it is included as part of the interest rate, then by definition it would probably exceed the perhaps the usury laws in various States, or exceed the limits on the UCCC in which case it would violate the law.

Otherwise, it should be stated as being a greater interest than otherwise would be assessed.

Senator PROXMIRE. Who pays for the free ride on credit card plans?
Credit buyers, cash buyers, or both?
Do you have any figures on this!
Mr. MANDELL. I don't have any figures.

In discussing that question we should distinguish between the bank cards and the store cards. I think the stores who issue credit cards can probably raise the price to cover at least part of the costs. So the welfare transfer is not so clearcut there.

I think in the case of the bank cards, the credit payers probably pay at least a major portion of the cost.

Senator PROXMIRE. There is where you have the transfer between low and high income.

Mr. MANDELL. Yes.

Senator PROXMIRE. Low income people are likely to use their credit card as an installment device and pay interest over time. The high income people use it as a convenience and pay it before the interest hits them.

Mr. MANDELL. Right.
Senator PROXMIRE. So the rich get richer and the poor get poorer.
Mr. MANDELL. Right.

I think it was a funny situation initially when the cards were sent through the mail unsolicited, they sent them to good credit risks. They felt these people would not default on their payments and that these credit card holders were more secure and they found that the transactions cost, essentially the discount that the merchants paid, which could range anywhere from zero to 6 percent, was grossly insufficient to cover the true costs of credit in that case, and they would have to shift their credit card operations more into the middle and lowermiddle income families.

I believe that one of the bank credit card companies undertook an experiment in Columbus, Ohio; although I am not sure of the details of this experiment, I believe they made credit cards widely available to groups who did not formerly get such cards and did not allow charges at supermarkets, for example. Knowing that the return on sales in supermarkets is below_2 percent, one wonders how they could expect to make any money. The only thing that comes to my mind is that they were hoping to attract large numbers of people to get into debt on these cards.

I think it is well established in the industry now, that you must have the honest billpaying low- or middle-income Americans in on your credit system, to make it break even.

Someone even sent me a copy of the Financial Times of London after hearing me talk on the subject several months ago. In that they

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