Simpler Credit Card Agreements: Will it Help Consumers?
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The Obama administration announced a proposal today aimed at simplifying credit card agreements for consumers, but it remains to be seen whether the plan has a long-term impact.
The Consumer Financial Protection Bureau launched a prototype credit card agreement today that lists the various charges associated with the card and features boxes explaining the different terms and agreements. The prototype is designed to be understood by a seventh grader. Current credit card agreements are written for people at an eleventh grade reading level, but are often incomprehensible even by adults and one of their main purposes is to protect banks from legal complaints.
The prototype will be tested at the Pentagon Federal Credit Union, which has about 350,000 cardholders.
But whether it has a far-reaching impact remains to be seen. The proposal is simply that — not a mandatory rule the card companies have to follow. The agency is soliciting public feedback for the proposal and will determine the next steps after that and the initial test run at the Pentagon credit union.
“If this can go into effect and doesn’t get squashed in the meantime, it will be a meaningful thing for consumers to have simple credit card agreements that are truly meant to communicate the terms of the account. Because in reality, credit card agreements in today’s world are strictly written to protect the banks from litigation and really make a cursory effect to communicate,” said Ben Woolsey, director of marketing and consumer research at CreditCards.com.
But the outcome will depend in a large part on the agency’s political future.
Republicans are threatening to block the nomination of Richard Cordray as CFPB head because they want to force structural changes to the bureau, including more Congressional oversight.
“We want accountability for this agency, which has none today as it’s structured,” Sen. Richard Shelby, R-Ala., said Tuesday, calling the bureau a “a monster, as far as future regulation, to over-regulate our economy, create more regulations and fewer jobs.”
The bureau, which was created in July as part of the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, has already taken on several consumer-related actions, but it’s not yet clear how much influence it can wield in the powerful credit card industry.
“It still remains to be seen if the Consumer Financial Protection Bureau is going to have any teeth… considering how much trouble they’re facing just getting a permanent director put into place,” Woolsey said. “The agency was created during a time of unusual Democratic power in the House and Senate and obviously the balance of power has shifted.”
The American Bankers Association released a statement cautiously praising CFPB’s proposal as a “good first step” but hinted that more protections would be needed to protect banks against lawsuits.
It “could be made even shorter, as well as less susceptible to costly lawsuits and the higher consumer prices that come from them,” Kenneth Clayton, ABA’s chief counsel, said in a statement.
Simplifying credit card agreements and providing more transparency has been a top agenda item of consumer groups.
Two-thirds of the millions of cardholders don’t completely understand how their cards work, a recent study by J.D. Power found. And difficulty understanding the terms of their cards is a big factor behind many consumer complaints, according to the CFPB.
Credit cards are a significant part of Americans’ lives. There were nearly 514 million credit cards in circulation as of Dec. 31, 2010 and the market represented $700 billion in outstanding household debt, according to the Nilson Report.
The proposal unveiled today is part of a broader effort by the administration to regulate the credit card industry. The first step was the Credit Card Accountability, Responsibility, and Disclosure Act signed by Obama in 2009.
The first consumer-protection law for credit card in decades, the Act set guiding principles for long-term reform, banned fee traps, protected consumers against arbitrary interest rate increases, and called for more accountability.
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Do yourself a favor and get a credit card from a credit union. They work for you, they don’t charge crazy fee and their interest rates are lower. Don’t be fooled by the ‘gotcha’ cards big banks frequently send out with low teaser rates. If you read the fine print, one late payment sends your interest rates skyrocketing permanently.
To have a good credit rating you need at least two major credit cards, just using them twice a year for a small purchase is enough to make your credit rating improve.
Posted by: Librarian53 | December 7, 2011, 2:44 pm 2:44 pm
“Simpler Credit Card Agreements: Will it Help Consumers?” The question is “Will consumes read the agreements?” and if they don’t understand or they have concerns “Will they ask someone who does know?”
Posted by: deanbob | December 7, 2011, 5:40 pm 5:40 pm
If you only have the reading comprehension level of a 7th grader you shouldn’t have a credit card. The concept: You use your card to defer payment. When you get the bill you pay the bill. Not rocket science.
Posted by: glacia | December 7, 2011, 6:38 pm 6:38 pm
Let’s stop belittling customers and instead actually examine a standard form that is easier to read. This more easily read document may lead to needing fewer corporate lawyers who write laborious documents. Comparing accounts, even between the same lending institution would be more easier. Our country could quit spending money on tedious nonproductive busy work. This would be a way for all of us to get ahead.
Posted by: CFoster | December 7, 2011, 9:12 pm 9:12 pm
Enough already. Every time this administration comes up with another banking reform, it costs me money. For 40 years I never paid anything for a bank account, a debit card, whatever. Now I do because of some cock a maimee proposal made in Washington to simplify for those who can’t read to begin with.
Posted by: Tkulaga | December 8, 2011, 2:50 am 2:50 am
To Libarian53 – I had a credit union credit card and the points earned by purchases expired after a certain time period. I now have a card where the points do not expire. If we all had the same reason for obtaining and using a credit card (say interest rate) then the rates would be much more competitive. I pay my card off each month and am interested in maximum benefits.
Posted by: karek40 | December 8, 2011, 8:23 am 8:23 am
Most consumers do NOT read the small print in an agreement or contract. My credit card charged me 9.9% for years. When an unpaid balance is carried forward, they now charge me 15.23%. That is too much money to charge, especially when banks are giving 1-2% or so on deposits. In fact, some banks charge you for depositing larger amounts of money! The fix for the problem, go to a federal credit union or similar credit union and they will TELL YOU what the charges are and will work with you, and not against you. Banks generally dislike credit unions intensely. Credit unions generally do not have to make money other than reasonable expenses, and use client monies to lend to other credit union members. If you do not like the charges banks are making, please consider reasonable alternatives. I am not anti-bank per se, I am strongly PRO credit unions. Banks are like a building with water running through it. Their job is to divert as much of the water as possible, to remain at the bank and out of your pocket. I can tell you that even with credit scores in the 800s and 900s, banks are reluctant to lend money to anyone. I ended up with a very low interest rate on a credit line on my home, and to date, have used none of that credit. It is NOT unAmerican to pay with cash and live within your means. Too bad our government deals almost exclusively in I.O.U.s., no balanced budgets submitted and content on raiding or borrowing more against the Social Security trust.
Posted by: curtis41 | December 8, 2011, 9:38 am 9:38 am
“If we all had the same reason for obtaining and using a credit card (say interest rate) then the rates would be much more competitive.” That may be true, but credit cards are essentially meant to be “convenience credit” intended for short term credit, not alternatives to installment financing. The high interest rates should encourage people to pay them off quickly rather than accrue huge balances for months at a time but that clearly is not what has happened. If credit card rates were lower my opinion is that people would rack up and carry even higher balances which is exactly the opposite of what credit card holders should be doing.
Posted by: MyTake | December 8, 2011, 10:13 am 10:13 am
When the Almighty himself condescends to address mankind in their own language, his meaning, luminous as it must be, is rendered dim and doubtful by the cloudy medium through which it is communicated. – James Madison The Federalist #37. “Simple” agreements aren’t necessarily better they can be more vague and open to interpertation. There is a reason these are in legalease, it’s the best way to convey all the rights and responsibilities of both parties in the most unambiguous way possible.
Posted by: IdiotMine | December 8, 2011, 12:06 pm 12:06 pm
No, this will not help consumers. It’s oversimplified. Credit cards are not simple and making them look simple will mislead undereducated consumers.
My main problem with this proposed agreement format is that there’s no room for detail and as a result, credit card companies will fill in the small blanks with generalities, leaving the consumer with even less information regarding a product that already suffers from ambiguity.
The current format of card agreements is good. The problem is that card agreements are difficult to come by. Most cardholders likely do not keep copies of their agreements, then when they want to see them, the agreements are no where to be found on most issuer websites. (note: current agreements are available online through cfpb, however their descriptive titles regularly leave one scratching their head as to which is the correct agreement for their particular card)
If we’re going to force (or strongly encourage, whatever you want to call it) companies to change card agreements, let’s force them to make their current applicable card agreements more readily available. When you log in to your account online, you should be able to retrieve your card agreement without having to request the issuer mail it to you then wait for it to arrive.
For that matter, require issuers to make all revisions available that have been in effect from the date the account was opened so we can see where they’ve change what we originally agreed to.
All in all, the problem isn’t the agreement. The problem is the consumer. Credit is a big kid game. If the consumer isn’t ready to be a big boy or big girl, then perhaps they shouldn’t be in the game.
Posted by: bdp | December 29, 2011, 8:41 pm 8:41 pm
I’m gone to tell my little brother, that he should also visit this blog on regular basis to take updated from latest news.
Posted by: Scot Reddig | February 1, 2012, 1:38 pm 1:38 pm
Can you tell us more about this? I’d care to find out more details.
Posted by: Burt Colpack | February 23, 2012, 3:05 pm 3:05 pm
I think a visualized presentation can be better then only a easy text, if things are defined in graphics one can easily understand these.
Posted by: Joetta Girard | February 23, 2012, 3:27 pm 3:27 pm