SD4 - Credit Card Billing Practices in Virginia

  • Published: 1986
  • Author: University of Virginia
  • Enabling Authority: Senate Resolution 34 (Regular Session, 1985)

Executive Summary:
The amount a credit card user pays in finance charges depends heavily on three factors--the rate of the finance charge, the balance on which the finance charge is computed, and the free period, if any, within which finance charges may be avoided. This report, prepared at the request of Virginia's 1985 General Assembly, deals with the latter two components. The first component, the rate of finance charge, was addressed by the Virginia legislature in 1983 when prohibitions on the maximum rate of finance charge were removed.

Current legislative interest in credit card balance computation methods and free period allowances has several origins. The cost of credit for consumers has traditionally been a major concern of state legislative bodies. More families are now using credit cards, fewer families are paying in full during a billing period, and outstanding balances are larger than ever. Moreover, the effects of regional interstate banking on the pricing and availability of consumer credit services pose new uncertainties. Competition for cardholder accounts is nationwide. Yet card issuers, even those within a region, extend credit under differing state laws.

The report focuses on three public policy issues: Is the information card issuers disclose about the methods they use to assess finance charges adequate? Is card billing efficiently done? Is card credit fairly priced? Materials relevant to these issues were collected from a variety of sources and by several methods, including survey questionnaires sent to card-issuing banks and retailers, interviews with public officials, and perusal of government files of consumer complaints.

The study concentrates on bank and retail credit cards. Users of these cards are more apt than users of American Express, Carte Blanche, and other types of cards, to rollover unpaid balances from one billing cycle to the next and, therefore, to pay finance charges.

One of the study's main findings is that consumers are not adequately informed about the financial consequences of rolling over unpaid balances. Banks and retailers, as the free period provision of Virginia law requires, do not impose a finance charge upon a cardholder if the account balance is paid in full during the billing cycle. (The free period pertains only to purchases of merchandise or services and is not required of card issuers for cash advances made under bank credit card plans.) A practice that is becoming more common is to charge interest in the second billing cycle retroactive to the date of the posting of each purchase to the account during the first billing cycle, if the account was not paid in full. The calculation of finance charges is complex and can vary substantially among cards, even though identical balance computation methods and annual percentage rates (APRs) are used. People who have unpaid balances on their credit cards can pay more than double the stated APR and not get a 25-day free period.

A second main finding relates to the need to find a way to reduce any subsidies rollover customers make to support the convenience needs of non-revolvers. From the day a purchase is posted to a customer's account until payment is received, funds are loaned to the customer. Yet, under the free period provisions, no finance charge revenues are received from non-revolvers. The pricing of bank and retail credit cards, in effect, reflects the need to cover a major share of the total costs of credit card operations through finance charge revenues derived from accounts with rollover balances.

A third main finding is that banks and retailers with large volumes of credit card transactions have made card processing more efficient by the application of electronic fund technology to these operations. Multipurpose cards, which combine credit with money transfer services, are becoming common. While state government policy should be to foster electronic transfer and related efficiencies, a free period discourages consumer use of money transfer services at the point of sale.

A fourth main finding is that the statutory requirements relating to payment posting periods of financial institutions and merchants are becoming outdated. Payments are increasingly posted to accounts soon after the date of transaction, and payments are credited on the date of receipt. Most card issuers mail bills no later than six days after the close of the billing cycle.

Several legislative options are possible to remedy perceived market deficiencies:

1. Prohibit calculation of finance charges using purchases from a previous billing cycle.

2. Allow a user fee for a credit account by eliminating the statutory free period requirement.

3. Bar minimum finance charges and late fees.

4. Repeal the statutory provision that mandates that a free period be given on purchases of merchandise and services.

5. Simplify the state's consumer credit laws by deleting provisions relating to the mailing of card statements: monitor new and developing credit transaction methods.

6. Require a standard method of assessing finance charges.

7. Provide Virginians with information about consumer credit laws that clearly states how the APR, balance computation method, and free period affect the total cost of credit.

The first four proposals relate to the fairness issue, the next one to mailing dates, and the final two to information disclosed. All are suggestions as to what the General Assembly might do, not what it should do; that decision rests with legislators as they review and reflect on the study's findings.