Note: Descriptions are shown in the official language in which they were submitted.
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VARIABLE TIERED INTEREST RATE REVOLVING CREDIT SYSTEM AND METHOD
Background
This invention relates to methods and systems for operating revolving
credit programs and, more specifically, to revolving credit programs in which the interest
rate applied to an outstanding balance is varied according to an external index.Revolving credit programs typically are offered by banks, savings and
5 loans, federal savings banks, credit unions and other credit providers, and operate to
advance funds as cash advances or to pay for purchases made by a customer, such as
through a credit card or a personal line of credit, and in some instances to pay for
checks written by the customer, or to cover funds provided through other access
devices, such as automatic teller machines, telephone communication devices and
10 personal computers. Under such revolving credit programs, a customer enters into an
agreement with a credit provider in which the unpaid balance of the customer's loan is
assessed a finance charge which represents either a fixed interest rate or a variable
interest rate which is tied to the prime rate or some other interest rate index.Once debt is incurred, the customer generally has three options for
15 repayment of the debt. One option is for the customer to pay the entire outstanding
balance and, in the case of purchase transactions, avoid assessment of any interest or
finance charges. A second option is for a customer to pay a minimum amount required
by the credit provider to reduce the amount of the outstanding balance and defer the
remaining outstanding balance for later payment. In that case, the customer is
20 assessed interest or finance charges based on the remaining outstanding balance.
Under the third option, the customer pays more than the minimum
required by the credit provider, but less than the entire outstanding balance. If this
alternative is chosen, the customer is assessed interest or finance charges in the same
way as the second option.
. . . . . .
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There presently exist programs in which a tiered interest rate is applied to
an outstanding balance. Specifically, different interest rates are applied to various
levels of an outstanding balance. Further, systems exist in which different interest rates
are applied to varying levels of purchases, or to types of purchases. All such programs
5 are designed to encourage the credit customer to increase purchase volume and/or
increase outstanding balance.
The market for providing credit is highly competitive, with banks, savings
and loans, credit unions and credit card companies all pursuing the same potential
borrower. In order for a credit provider to remain competitive, especially in an economy
10 which is subject to frequent changes in the cost of money to the credit providér, it is
necessary to adjust the interest rate assessed on outstanding balances in order to keep
pace with changes in, for example, the Prime Rate.
Furthermore, it is desirable to maintain levels of personal debt at a
minimum, which tends to minimize credit card delinquency rates. Accordingly, there is
15 a need for a revolving credit system which provides an incentive to encourage a credit
customer to pay off his or her outstanding balance quickly. Furthermore, such a system
should be keyed to an external index, such as the Prime Rate, so that the rates offered
customers are competitive, and at the same time provide the lender with a profit margin
which will remain relatively constant. Such a system should also be entirely automated
20 and operable on the plafform of a personal computer or computer network.
Summary
The present invention is a fully automated system and method for
operating a revolving credit program through a credit provider which provides an25 incentive for revolving credit customers to minimize their revolving credit debt, thereby
encouraging responsible financial management. Furthermore, the invention provides
an interest rate which fluctuates with an external index, such as the Prime Rate or a
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treasury bill rate, or an internal rate, determined by the lender, thereby providing a
lender with a relatively predictable margin or spread.
In a preferred embodiment of the invention, a revolving credit system and
method are provided in which the interest rate finance charge applied to the
outstanding balance of a customer's account varies according to the percentage of the
outstanding balance paid by the customer in a billing cycle, and according to variations
in the Prime Rate, while maintaining a constant ~Ispread~ (e.g., a rate of 2 percentage
points over Prime). The greater the percentage of the outstanding balance paid off by
the customer in a billing cycle, the lower the interest rate applied to the remaining
unpaid outstanding balance during the next billing cycle. In the alternative, the interest
rate finance charge can be varied according to the percentage of other parameters of
the account, such as beginning balance, highest balance or average balance in the
billing cycle.
Also in the preferred embodiment, the system and method provides a
tiered interest rate structure. For example, for a current Prime Rate of 8.9 % and a three
tier system of 5%, 3% and 2% is in place, if a credit customer pays 2% of the
outstanding balance in a billing cycle, the interest applied to the remaining outstanding
balance would be 13.9% (current Prime Rate of 8.9 % plus 5%); if the credit customer
pays 3% of the outstanding balance, the applied interest rate is reduced to 11.9%
(current Prime Rate of 8.9 % plus 3%); and if the credit customer pays 5% or more of
the outstanding balance, the applied interest rate is further reduced to 10.9% (current
Prime Rate of 8.9 % plus 2%). Of course, other external indices, index spreads, and
payment percentages can be applied, as well as different numbers of interest rate
"tiers," without departing from the scope of the present invention.
Consequently, the system and method of the present invention is
sufficiently flexible to accommodate month-to-month variations in a credit customer's
financial situation by offering a number of different payment options, and is responsive
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to month-to-month variations in the cost of money to a lender. The tiered applied
interest rate structure of the invention allows a credit customer to choose his or her
minimum payment and interest rate, while at the same time maintains a reasonablypredictable margin for the lender.
The system and method of the preferred embodiment of the present
invention also provides a display, which may be on a monitor or in printed form, of the
previous outstanding balance, the payments received, the finance charge applied, the
new outstanding balance and the minimum payment amounts necessary to qualify thecredit customer for each interest rate level, and the interest rates applicable for the next
1 0 month.
The system is designed to be operable on a personal computer, a network
of personal computers, or on a mainframe computer, and includes software having a
set of instructions for operating the computer. The software is stored on a disk, tape,
hard drive or other storage media, and is loaded into the memory of the computer from
storage during use. All information pertaining to the account is kept in storage in the
computer, or is accessible over a network, as is the table of payment percentages and
corresponding interest rates, and payment amounts required to achieve each rate tier.
The interest rates are varied monthly, if need be, by inputting the Prime Rate (as in the
preferred embodiment) as of a given day, such as the 25'h day of the second month
preceding the first day of the billing cycle. The Prime Rate is added to the spread
points for each tier scale to determine the applied interest rates. Alternatively, the
numerical values of the applied interest rate (the sums of the Prime Rate and the
spread points for each tier scale) is inputted to the system. Each transaction, whether it
is a payment or a debit to the account, is also entered and stored for each account.
The system is adaptable to be used with credit card programs, home
equity loan programs, and unsecured lines of credit, to consumers for personal, family
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and household purposes, as well as to business entities for business, agricultural, and
governmental uses.
Accordingly, it is an object of the present invention to provide a system
and method for operating a revolving credit program; a system and method for
5 operating a revolving credit program which encourages a credit customer to pay off an
outstanding account balance quickly; a system and method for operating a revolving
credit program having a tiered i"ler~st rate structure such that a lower interest rate is
applied to a remaining outstanding balance in response to higher balance percentage
pay-off in a billing period; a system and method for operating a revolving credit program
10 in which the interest rate applied at each tier varies with an external index, such as the
Prime Rate; and a system and method for operating a revolving credit program which
can be operated from a personal computer, network or mainframe plafform.
Other objects and advantages of the present invention will be apparent
from the following description, accompanying drawing and the appended claims.
Brief Description of the Drawing
The Figure is a flow chart showing the operation of the method of the
present invention on a personal computer. computer network or mainframe.
Detailed Description
The Figure shows a flow chart which represents the operation of a
personal computer, computer network or mainframe programmed to embody the
system of the present invention and to perform the method of the present invention.
25 The instructions for performing the process of the system preferably are in the form of
computer software which is kept in a storage medium, such as a disk, tape, hard drive
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or the like. The software is loaded into computer memory from storage when the
program is to be implemented.
Functional block 10 represents the "wait state" of the system. The
method of the invention is triggered by the occurrence of either the end of a billing
5 period or a transaction being entered into a credit customer's account. In the preferred
embodiment, a timing program (not shown) internal to the computer plafform and
operated according to the method of the invention will signal the system of the end of a
billing period, which may correspond to the end of a calendar month. Accordingly,
functional block 12 indicates that the system is activated at the end of a billing period,
10 or, as shown in block 14, if a transaction is entered. If no transaction occurs,~and the
end of a billing cycle has not occurred, the system remains in the wait state of block 10.
If there is a transaction, as shown in block 14, the operator or system
enters the credit customer's account number, the nature of the transaction (i.e.,
payment, debit or the like) and the date of the transaction, as shown in block 16. This
15 information is stored in the computer system, as shown in block 18.
The central processing unit of the computer system then reads into
memory from storage the current outstanding balance of the credit customer's account,
as shown in block 20. Once the current outstanding balance is read into memory, the
outstanding balance is adjusted by the transaction amount in order to arrive at a new,
20 interim outstanding balance ("I.O.B."), as shown in block 22. This new interim
outstanding balance is then stored in the system, as shown in block 24. The system
then returns to the wait state of block 10. This iteration through blocks 10-24 may occur
several times in the course of a billing cycle, each time a transaction is entered. A
billing cycle typically is a one month or thirty day calendar period, but may be any time
25 period agreed upon by the credit provider and the credit consumer.
At the end of the billing period, shown at block 12, the system is
programmed to calculate an average daily balance, shown in block 26. The average
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daily balance method is a conventional calculation in which the l.O.B. at each day of the
current billing period is determined, then the daily balances are averaged over the
billing period. In the alternative, the system may be programmed to calculate finance
charges based on ending balance, two cycle average daily balance, and the like,
5 without departing from the scope of the present invention. This average daily balance,
or amount calculated using one of the alternative methods listed above, is then stored
in the system, as shown in block 28. In addition, the total payments made during the
current billing period are summed and stored, as shown in block 30.
The central processing unit next calculates the percentage the total
10 payments made during the current billing period comprise of the previous month's
outstanding balance, or the percentage of balance reduction, as shown in block 32.
The unit then reads a value representing the Prime Rate (or other external index) as of
the 25'h day of the month preceding the first day of the billing cycle. This Prime Rate is
inputted to an appropriate file in data storage for the personal computer or mainframe
15 by an on-line connection between the lender and the service provider, so that the value
representing the Prime Rate can be directly inputted, as shown in block 34. The data
processor then adds the Prime Rate value to stored values representing the spread
points for each tier scale, to determine the applied interest rates, as shown in block 36.
Alternatively, the numerical values of the applied interest rate (the sums of the Prime
20 Rate the and spread points for each tier scale) are calculated by an individual and
inputted to the system.
The system then selects the appropriate tier scale for the credit customer
or borrower, as shown in block 38. As shown in block 40, the system then reads the
stored table of percentages and corresponding tiered interest rates and compares the
25 calculated percentage of balance reduction of block 32 to match it with one of the
stored percentages of the table. Each stored percentage in the table has a
corresponding interest rate, calculated as shown in block 34. In the alternative, the
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system can utilize other customer account parameters, such as comparing the balance
reduction to the beginning balance or to the highest balance in the billing cycle to
determine a percentage, without departing from the scope of the invention.
The interest rate corresponding to the percentage which matches the
5 percentage of balance reduction calculated in block 32 is then selected as the applied
interest rate, all as shown in block 40. The applied interest rate selected in block 40 is
then applied to the average daily balance (UA.D.B.'') calculated in block 26 and stored in
block 28, to arrive at a finance charge, as shown in block 42.
The finance charge is then added into the l.O.B., calculated in block 24, to
10 arrive at a new balance. This new balance value is then stored, as shown in-block 44.
The new balance then becomes the "outstanding balance" which is read and adjusted
pursuant to the process shown in blocks 14-24 in the next billing cycle.
Using the new balance calculated in block 44, the system then calculates
and stores the minimum payments necessary to meet the threshold percentages
15 necessary to qualify for the varying tiered interest rates of block 40, as shown in block
46. Finally, a statement (or terminal display) is generated by the system which shows
values for the new balance calculated in block 44, the finance charge calculated in
block 42, and the proposed minimum payments calculated in block 46 to qualify for
each tiered level of interest, as shown in block 48 and the interest rates for each tier
20 calculated in block 36. The statement may contain any or all of this information in
addition to other account information and disclosures as required by federal law and
subject to change from time to time.
If the display is in the form of a statement, the statement is then sent to
the credit customer. Therefore, the credit customer not only receives a current status
25 report of his or her account, showing the current new balance, the finance charge
applied and the payments received in the just-completed billing cycle, but the credit
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customer also receives a schedule of minimum payments necessary to qualify for each
tier of reduced interest rates effective for the customer's next billing cycle.
Specific Example
In a specific example, the Prime Rate as of the 25'h day of the month
preceding the first day of the billing cycle is 8.9%. The spread points for a tier scale are
as follows:
TABLE 1.
Percent of Outstanding Balance Paid Spread Points
5% and over 2%
3% to 4.99% 3%
2% to 2.99% 5%
Accordingly, the applied annual interest rate would be as follows:
TABLE ll
Percent of Outstanding Balance Paid Applied Ann. Interest Rate
5% and over 10.9%
3% to 4.99% 11.9%
2% to 2.99% 13.9%
If a credit customer has an outstanding balance at the end of a billing period of, for
example, $3000.00 (comprising, for example, principal of $2960.00 and a finance
charge of $40.00), and during the course of the subsequent billing period makes a
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payment on day 14 of that subsequent billing period of $150.00, the balance at the end
of that subsequent billing period (before the finance charge is applied) will be $2850.00,
a balance reduction of 5%. Then, according to the Table ll set forth above, the credit
customer qualifies for an applied annual interest rate of 10.9%, which is a monthly
5 periodic rate of 0.9083%.
This 0.9083% is applied to the average daily balance to arrive at the
finance charge. In this example, the average daily balance would be $2897.67, which
is arrived at by adding up the outstanding unpaid principal balance for each day of the
billing period and dividing the total by the number of days in the billing period (for
10 example, 30 days): -
($2960.00 x 13 days) + ($2850.00 x 17 days) = $2897.67
30 days
The finance charge would then be $26.32 ($2897.67 x 0.9083%), making
a new balance of $2876.32. The calculations would be similar for any ending balance
representing an outstanding balance reduction of 5% or more, up to but not including
full payment of the outstanding balance. Specifically, the same monthly periodic rate
would be applied from the table, but the average daily balance, and therefore the
20 finance charge, would be less.
If the credit customer pays only $90.00, which would result in a balancereduction of 3%, according to Table ll, an annual interest rate of 11.9% (which is a
monthly periodic rate of .9917%) is applied to the average daily balance, which would
be $2931.67 (assuming payment of the $60.00 is made on day 14 of the billing cycle),
25 resulting in a finance charge of $29.07, which is added to the interim outstanding
balance of $2910, for a new balance of $2939.07. The system would perform similar
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calculations for any ending balance representing an outstanding balance reduction of at
least 3% and up to 5%.
Similarly, if the credit customer pays only 2% of the $3000.00 outstanding
balance, a payment of $60.00, the average daily balance would be $2948.67 (againassuming the payment of $60.00 is made on day 14 of the billing cycle), and the
applied annual interest rate for a 2% balance reduction taken from Table ll is 13.9%, a
monthly periodic rate of 1.158%. The finance charge is then $34.15. Accordingly, the
new balance would be $2974.15. However, if the credit customer pays less than 2% of
the outstanding balance, the same annual interest rate is applied, but that credit
customer would be considered delinquent.
Of course, the look-up table represented by Table ll above and utilized in
block 40 of the Figure can be varied to provide for different numbers of "tiers," or for
different interest rates for each percentage tier, or for different percentages of balance
reduction, without departing from the scope of the present invention.
Applying the values set forth to the display block 48 for a 5% balance
reduction (i.e., a payment of $150.00 toward an outstanding balance of $3000.00 in the
specific example), the display would include a listing of the new balance of $2876.32.
Furthermore, the display of block 48 would also include a listing of the minimumpayments necessary to meet the 5%-3%-2% outstanding balance reduction to qualifyfor each of the tiered interest rates of Prime plus 2%, Prime plus 3% and Prime plus
5%, respectively, namely, payments of $144.00, $87.00, and $58.00, respectively, for
the new outstanding balance of $2876.32 discussed above (assuming that the PrimeRate does not change in the interim). These minimum payment amounts may be
rounded up or down to the nearest dollar amount without departing from the scope of
the present invention.
In conclusion, the credit customer is encouraged to make larger payments
which represent larger percentages of the outstanding balance in order to qualify for the
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corresponding lower applied interest rate. An end resJlt desired by the credit provider
who utilizes this system would be fewer delinquent accounts. Furthermore, by tying the
applied interest rate to an index such as the Prime Rate, the lender can stabilize the
return generated by a particular account.
The tiered interest rate system of the present invention can be utilized
with any revolving credit program, including credit card programs, home equity lines of
credit, and secured and unsecured lines of credit. Such programs can be used by
individuals for home, consumer product and automobile purchases, and by businesses
and governmental entities for commercial and agricultural purchases.
While the form of apparatus and method herein described constitute
preferred embodiments of this invention, it is to be understood that the invention is not
limited to these precise forms of apparatus and methods, and that changes may bemade therein without departing from the scope of the invention.
What is claimed is:
