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

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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