Bank Credit Card Charges and the Interest Free Period: Balancing Equity and Efficiency

Abstract

There has been a continuous debate on the role and impact of credit cards and whether some practices adopted by this industry should be regulated. Regulators have been concerned about the interest rates and charges levied by card systems generally, and in particular with the shifting of the incidence of some of the costs of card operations to transactions where payment is made other than by credit card. While the cross subsidy problem arising from the latter practice has been addressed in relation to the interchange fee concerning cash payers, card users, merchants, and banks, no serious attempt has been made to address the problem of cross subsidies made in favour of credit card users who pay their debts within the interest free period by those who are unable to pay their debts in time. Consequently, there has arisen a form of upside down equity where the poor generally are subsidising the rich. This paper addresses this latter issue and suggests that the way to eliminate this problem of upside down equity is to adopt a user pay system.