Computer Chalks Up High Interest Rate

Question: Can you top this? We paid our July BankAmericard Visa account in full before the due date for $789.77. In reconciling our Security Pacific checking account statement that month, I noticed that the printout showed the value of the check to be $787.77, a difference of $2 from the amount shown on the original check, which I verified.

Since the difference was only $2, I simply made a note of it and forgot it. That was a mistake.

The next BankAmericard Visa statement showed a previous balance of $789.77 with a payment of $787.77. We owed them $2 from the previous month because of Security Pacific’s error. BankAmericard Visa’s response was to charge us $29.71 in finance charges, based on our new balance of $3,082.25.

Paid in Full

Because we always pay our credit card charges in full before the date due, I could not understand this finance charge. When I inquired at the card center, I was told that this outrageous financing charge for the $2 was determined by the card center’s method for calculating interest.

When I explained that the error was Security Pacific’s and not ours, the representative immediately said the financing charge would be removed from our bill.

While I am grateful for this prompt correction, I remain appalled at these usurious practices. Even by today’s freewheeling standards, a 1,500% return seems a bit much to pay--especially for someone else’s error.--M.A.R.

Answer: For something as smart as they pretend to be, computers otherwise couldn’t operate a lateral zipper.

Without getting too involved, according to Larry Williams, BankAmericard Visa’s spokesman in San Francisco, here, roughly, is how the computer handles your account: It scans the last billing cycle (which, let’s say, is from the first day of the month to the 30th), adds the previous unpaid balance, all new charges, instant cash and whatnot and then speedily subtracts all of the payments made and any credits earned (for returned goods, for instance), divides this by 30 and multiplies it by 1.65% for the finance charge.

Clever devil that it is, the computer spots immediately when the amount due has been paid in full, Williams adds, and doesn’t add on any finance charge. Anything less than the total amount due, however, and it goes back to Day 1 of the billing cycle and goes through the procedure above.

Because of the $2 error the computer was triggered to go back to Day 1 and--by a fluke of circumstances--most of your major purchases that month were made early in the month, and so the finance charges were computed just as if you hadn’t paid anything.

“If it had been 99 cents,” Williams said, unhappily, “the computer would have ignored it, and there wouldn’t have been any finance charges.”

Wrong Assessment

And yes, you’re right, even if it had legitimately been your error, instead of the bank’s, the computer should have figured the finance charge only on the basis of the $2 unpaid balance and assessed you something less than one cent. And even the computer would have been smart enough to see the silliness of this.

According to Williams, you promptly paid off the new balance of $3,082.25, the $29.71 in erroneous finance charges were knocked off your record and everything is now in order. Don’t look for a whole lot of logic in how the computer fouled things up. Math, not logic, is its strong suit.

Q: About a year and a half ago my husband and I became aware of the fact that we could save a tremendous amount of money by adding something extra to the regular payment we make each month on the second mortgage we have on our home. In addition to the regular payment I would add another $100 or $150 to the check and make the notation that X dollars were for the regular amount due and that the other $100 or $150 should be applied to principal only.

I suppose that we should have been alerted to the fact that something wasn’t quite right when we found out that, every once in awhile, one of the checks written on the third or fourth of the month still hadn’t cleared our bank when we got our statement on the 20th or 21st of the month.

Refinance Decision

It wasn’t until we decided to refinance this second mortgage recently (to get a substantially lower rate) that we found out that in a single year we had been stuck with almost $100 in “late charges,” which had accumulated and had been deducted at the time of closing. Five of the 12 payments the previous year, in fact, had been classified as “late” even though such a charge isn’t supposed to be imposed until the 15th of the month, and the latest we had ever mailed any of them was about the 10th of the month.

The lender swears up and down that all checks are processed immediately, but, if so, what other explanation could there be for this?--M.J.F.

A: You’ve launched yourself on a personal financing strategy that is becoming increasingly popular and does, indeed, save a staggering amount of money at relatively little additional cost each month. So, now that you’re in the swing of it, don’t let yourself be turned off by a bookkeeping snafu that can certainly be ironed out.

The average home buyer, alas, rarely stops to compute just how much interest his mortgage is costing him--and, perhaps for his peace of mind, it’s just as well. A 30-year, $100,000 mortgage financed at 13%, for instance, means that when payoff time comes, 360 months later, he’s laid out a cool $398,232 in principal and interest for his $100,000 loan--the interest, alone, being just a hair under three times the amount he originally borrowed.

But, let’s take a relatively modest figure that might be more typical of the sort of second mortgage (or second trust deed as it is known in California) that you have taken out, we’ll say, for the purpose of financing a major home improvement. You’ve used the equity in your home to finance a $30,000 loan repayable over 30 years at 13%. Over 30 years, that $30,000 loan will end up costing you a total of $119,469 in principal and interest--$89,469 of it in interest alone. That’s based on monthly payments of $331.86.

How much more, each month, would it require to cut that obligation down from 30 years to 20 years--cutting an entire one-third off the length of the mortgage? Would you believe only $19.62 a month? Entire cost of the loan: $84,355, or a net saving in interest of $35,114.

Instead of $19.62, why not add $47.72 to your regular monthly payment of $331.86 (total: $379.58)? Now, you’ve cut the length of the second mortgage in half--from 30 years to 15 years--for a total cost of $68,324 and a net saving of $51,145 in interest.

Extra Payment

You’ve been adding “$100 or $150” a month to your regular payment, which is great even though you don’t mention the original amount of the loan. In the $30,000 example used here, however, an extra payment of only $116.08 (for a total payment of $447.94)--and which, I gather, would be roughly your average monthly overpayment--would cut that 30-year obligation down to just 10 years for a total cost to you of just $53,752. And that would be a savings in interest of $65,717 as opposed to taking the entire 30 years to pay it off.

Why the late charges in your case? Since you didn’t give me the name of the actual lender involved I couldn’t go to the horse’s mouth. But a sampling of lenders chosen at random gives us this consensus: Splitting the total of one check into two different accounts (one representing the normal payment for principal and interest and the other representing a payment to be applied to principal only) is still, in this Computer Age, largely a manual, time-consuming operation. What has obviously happened is that your monthly payment isn’t really being credited--as it should be--when the check is actually received, but only after this manual operation has taken place, which can be anywhere from five to 10 days later.

The consensus: Most, if not all, of those late charges shouldn’t have been imposed. You said that a couple of the checks might have been mailed as late as the 10th of the month so, conceivably, tardy mail service entailing five-day delivery might have been a part of the problem. But, again, not likely because most lenders normally throw in a one- or two-day grace period.

Demand Repayment

The recommendation: Photocopy the “Date Received” stamp on the front of the checks for which you have been assessed a late charge and demand repayment.

The prevention: Write two monthly checks in the future--one for the regular principal-and-interest payment and the other (clearly identified as such) being the principal-only payment.

The feeling is that this should solve the problem.