Copyright c 1992 by Nicholas Johnson
Iowa City Press-Citizen, Friday, June 5, 1992, p. 4D

Business

Interest builds in small print


Woodie Guthrie sang, "Some men rob you with a gun and some with a
fountain pen."  I just got a lesson in the fountain pen variety:  credit card
interest.  Right here in River City.

Don't be intimidated.  It's not that complicated.  Let's start with an
illustration.

The rule used to be:  to qualify for a loan you have to prove you don't
need one.  Now the banks are happy to lend you money -- for eight to
fourteen percent interest.

Suppose your friendly local banker stops you on the street.

"Have I got a deal for you," she says.  "Loans at 2 percent interest."

You're a little cautious, but you sign up for $1000.  You remember a little
high school math:  twelve months from now you'll owe $20 in interest. 
Pretty good deal.

Ah, but there's a catch.  The small print on the back of the loan
agreement says the banker decides what to calculate the two percent
against.   And the banker decides to calculate interest as if you'd
borrowed $12,500.  At the end of the year, it turns out, you owe $250.

"What's your complaint?" she asks, pointing to the small print.  "I only
charged you 2 percent.  Just like I promised.  It's just that I figured it on a
much larger amount than you ever saw."

Follow this so far?  If so you will soon understand how my local financial
institution calculates Visa bills.

If you don't like to pay credit card interest, always pay the bill in full
before it is due.  Right?  A month or so ago I couldn't find my Visa bill. 
So I guess that $1,000 will be more than enough, write out a check, and
send it in.

The next month the bill includes a "finance charge" for $16.  Upon
inquiry, it turns out the guess was wrong.  The first month's bill was
$1197.77.  I pay the second month's bill in full, including the additional
$197.77 and the $16 finance charge, four days before it is due.

Recall that if the first month's payment is $1197.77, rather than $1000,
there is no finance charge at all.

In effect, there is a "loan" of $197.77 from the credit card company.  It
runs from the seventh of one month (when it is due) until the fourth of
the next month (when it is paid).  To charge $16 interest on a 26-day loan
of  $197.77 amounts to $224.62 interest each year -- a whopping 114
percent!  Since the card advertises a 14.88 percent "annual percentage
rate" you understand my curiosity.

Silly me.  The rate is 14.88 percent.  It's just that they get to choose the
number to which it applies.  And the amount to which they choose to
apply it (as provided in the small print on the back of the bill) is the
entire amount.  Not just the $197.77 which wasn't paid, but the  $1000
which was!

Adding usury to fraud, they then change the rules.  They start adding
interest charges from the day of each purchase.  Of course, the card
holder has not yet received the bill and cannot know what the credit card
company's records show.  (This is why the interest normally does not start
to run until as much as a month after a purchase.)

When I ask for an explanation of where the $16 comes from it takes them
two weeks and dozens of mathematical calculations to figure it out.  I'm
no math whiz, but trust me, few consumers could figure this out unaided. 
(The computer just prints finance charges on your bill, it doesn't provide
formulas or reasons.)

Credit card companies need a fair profit.  Granted.  But they're already
getting handsome fees from the merchants who use their service.  How
much more do they need?

People who don't pay their bills on time _should_ pay interest on the
"loan."  Right.  But interest should only run from the date when the
payment is due -- not from some date, and on some amount, that bears no
relation to reason or honest dealing.

They can charge all of us interest from the day of every purchase (and
radically reduce the rate).  Or they can charge interest only on the unpaid
balance from the date when due (and raise the rate somewhat).  In either
case, the rules should be simplified, in large type, and consistent.

What they should be prohibited from doing is charging 114 percent
interest and calling it 14 percent.  Whether we call it fraud or usury, it's
not right.  When courts start handing out the same punishment to banker
robbers that they do to bank robbers we will have found justice in our
land.  And Woodie Guthrie would have cause to smile.

_______________

Nicholas Johnson, one-time Iowa City Press-Citizen columnist, teaches at
the UI College of Law.


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