Consumers throughout the country will soon have to pay higher finance charges on credit card accounts -- perhaps as much as 25 percent more in some cases -- because of a subtle change in the way that retailers and banks compute interest.
Under the new system, consumers will have to pay interest from the day they purchase merchandise and services on credit, when there is an outstanding balance, instead of having an interest-free grace period of as long as 30 days on new purchases.
A charge customer who has no outstanding balance and who pays the entire new balance before the due date will not be affected by the change. An estimated 15 to 20 percent of charge customers pay in full when they receive their bills, store officials said.
Companies that have switched to the new system or that plan to soon include the giant merchandising chains of Sears, Roebuck & Co. and J.C. Penney, and several local financial institutions that issue hundreds of thousands of Visa and Master Charge cards.
Notices explaining the new system already have been mailed to charge customers of Sears, which estimates that one of every four households has one of its accounts -- roughly 250,000 in the Washington area alone. The change will take effect on bills starting March 1.
J.C. Penney will switch to the new system with June bills, a company representative said yesterday. Notices alerting the chain's 16 million customers will be sent out shortly, he said.
Equitable Trust Bank of Maryland, which issues both Visa and Master Charge cards, will begin using the new system April 1. Several other banks, including First & Merchants National Bank of Virginia and United Virginia Bank, already have begun to use the new method.
Retail and bank officials said the higher financial charges reflect the general tightening of credit under federal anti-inflationary policies. They said the new charges are necessary to help offset the subsequent cost to them of obtaining money to lend and of continued increases in the cost of doing business.
"T'was pure economics," said William E. Cooper, vice president of United Virginia Bank, which has 600,000 Visa cardholders.
"In a world where you are paying 12 to 13 percent on money market certificates, that increases your expenses. And our credit operation expenses also are up," he said.
The change in computing finance charges -- which doesn't disturb the customary 18 percent annual interest ceiling -- has brought in additional income to United Virginia Bank, Cooper said.
Actual finance charges will vary according to the amount of purchase, the date of purchase and the outstanding balance. Here is how the new system will work:
A charge customer with an average daily balance of $100 makes a $50 purchase in the middle of the billing cycle.Under the old system, the finance charge at the end of the month would be based on the $100 average daily balance. At 18 percent a year the charge would work out to $1.50 that month.
But now, under the new method, the customer in this example would pay $1.88 a 25 percent increase. The additional 38 cents represents the finance charge that accured on the $50 purchase from the date it was charged until the end of the billing cycle.
Jackie Bilowt, a Sears representative, said this does not mean the company is taking in 25 percent more than before. She would not say, however, how much more the company will reap from the change.
Duncan Muir, a Penney's representative, estimated that the change will bring in about 4 percent more interest income for his company.
"We took in about $326 million in finance charge income in 1978," Muir said. "But our costs totaled $360 million."
Muir said that even with the change in finance charge methods, Penney's will probably continue to lose money on its credit operation.
"We are willing to take that loss because credit cards bring in business," he said.
Consumers hoping to avoid the higher finance charges by switching to other charge accounts may be disappointed.
Montgomery Ward & Co., which has 18 million cardholders, has been charging interest from the date of purchase for several years. Woodward & Lothrop, which has 650,000 charge customers, implemented that system in 1971. And several banks, including First National Bank of Maryland, which issues both Visa and Master Charge, has been using the system for months.
Now, these pioneers are being joined by much of the rest of the credit card industry.
Although retailers and banks across the nation are moving toward the new system, they have been barred by state laws from implementing it in some areas.
Nine states that forbid the new system are Vermont, Rhode Island, Maine, New Mexico, North Dakota, Nebraska, Mississippi, Michigan and Massachusetts.
The varying methods for computing finance charges are rooted in controversy dating back to the early 1970s.
At that time, the prevailing practice among charge companies was to base interest fees on the previous month's balance, rather than on the current average balance. But the use of the previous-month system was attacked by consumer advocates who said it was unfair to customers.
Retailers and bankers then switched over to the average daily balance system. Most, including Sears, excluded current purchases from the finance charge for at least one billing cycle, giving customers a grace period. Now that is disappearing.
Some credit card companies, however, retain the old method. Central Charge, owned by Riggs National Bank and used by about 100,000 cardholders in the Washington metropolitan area, has no immediate plans to charge interest on new purchases until the next billing cycle, said J. J. Lockwood, vice president and general credit manager.
First Virginia Bank, which has more than 300,000 Visa and Master Charge cardholders, is another holdout. But that could change soon, bank vice president Eugene G. Sorrell, Jr. said.
No decision has been made, Sorrell said. "But we are looking at the changes and we are watching competition."