I have received a big response to my recent article about credit card bills and whether or not consumers are being overcharged. A lot of frustrated readers have privately e-mailed me with their own very strong overcharging suspicions.
Fortunately, the credit card overcharging problem can be fixed with simple solutions that can be implemented immediately. Every day grammar school kids learn three basic lessons which if applied to bank credit card billing will instantly solve the problem. The three lessons are…
- Show your work
- No free do overs
- What’s good for the goose is good for the gander.
Banks need to “show their work” and tell their customers how they got to the answer. It isn’t good enough to get an answer without explaining how they got it.
Showing their work means putting on credit card statements columns that show the actual daily balance and the debits and credits that were used to calculate the balance. Currently, banks show the monthly average daily balance that is subject to finance charges but not the actual daily balance that is used for the calculation.
There is a big difference between showing the monthly average balance and the actual daily balance, and that difference prevents consumers from figuring out whether or not they were overcharged. Without the daily balance calculation (and the daily finance charge which is included in the daily balance) banks aren’t showing their work.
My daughter always gets points taken away for not showing her work. Banks should have regulatory points taken away as well.
Some of the readers who e-mailed me asked me to try to reconcile the finance charges on their bill. One reader had a balance of approximately $2,500 on her September bill. She sent in a payment to the credit card company of approximately $3,500 which resulted in a credit balance, i.e., the credit card company owed the reader money because of overpayment. The September payment was sent in to the bank right after the bill was received and credited to the account approximately 15 days before the due date. During the month of September my reader used her credit card and charged approximately $3,500 of purchases (no cash advances). Based upon the contract she believes she shouldn’t have had a finance charge on her October bill. But, the credit card company said that she had an average daily balance of approximately $1,500 and she owes approximately $15 in finance charges. While $15 isn’t a lot, she can’t recalculate the average daily balance to figure out how the charge was incurred and suspects that she wasn’t given credit for her overpayment of the previous bill. Moreover, she believes that since she paid her previous bill in full and before the due date she shouldn’t have incurred any finance charges.
Another reader told me that despite him and his wife paying all of their credit card bills in full every month and upon receipt, his last bill had a charge of $69 on approximately $800 of purchases. Looking at the bill it is clear that the credit card company calculated finance charges from the date of purchase despite the contract saying that if payment in full was made on time there wouldn’t be any finance charges. And, a one month charge of $69 on $800 of purchases is close to 100% compound interest. It’s a pretty good guess that the bill is in error.
Just like when our kids get answers wrong on a test or make an error in a game that counts, there needs to be a penalty for the error of overcharging. Refunds for overcharges don’t cut it. Refunds are like free do overs and every kid knows that when they take a test or play for keeps there are no free do overs.
Free do overs are for learning experiences. Credit card banks aren’t supposed to be in the business of learning. They are already supposed to know what they are doing and take responsibility for their errors.
Dollar for dollar refunds provides no incentive for banks to try to get it right when they bill their customers. Instead of dollar for dollar refunds, I think refunds should have added to them an amount equal to whatever the highest finance and overdraft fees that the bank would have charged a customer that overdrew his account by the same amount. Since each bank has a different set of penalty charges, each bank will have a different penalty for making mistakes.
Banning free do overs by charging banks penalties and giving the penalty to their customers seems pretty fair to me. After all, I believe “what’s good for the goose is good for the gander”.
In practice that means if your bank charges and overdraft fee of $35 per over draft (with a maximum of 7 charges per day) plus 24.9% interest, then your bank will have to pay for its mistakes at the same rate, i.e., $35 per mistake (with a maximum of 7 charges per day) plus 24.9% interest. And, if banks don’t own up to their mistakes and refuse to credit consumer accounts on a prompt basis, fees should accrue at $1,000 per day (after a 30 day grace period to fix the error). With real money on the line I am pretty sure that banks to get it right the first time they send out a bill.
On September 29th the Federal Reserve Board proposed amendments to Regulation Z (truth in lending) and while the proposed reforms are a good first step they need to do more and go farther.
It’s a shame that simple grammar school lessons seem to be revolutionary ideas for banks. Show your work, no do overs and what is good for the goose is good for the gander shouldn’t be controversial concepts that need a lot of thought to implement.