Is it possible to create a simple credit-card agreement, one that doesn’t give you a migraine as you struggle to understand the terms and conditions that, if violated, could put you into decades of debt?
I have my doubts. But the Consumer Financial Protection Bureau is giving it a try. The agency has released a prototype of a simplified agreement as part of its “Know What You Owe” campaign to help consumers understand the consequences of the debt they take on.
The agency wants the public to weigh in on its prototype by going to its Web site (www.consumerfinance.gov) as it conducts a pilot test of the agreement with the Pentagon Federal Credit Union. You can view a copy of the model statement at www.consumerfinance.
As soon as the agency unveiled the two-page agreement, the American Bankers Association offered its take on the model, calling it a “good first step.”
Then came the “but.”
“But [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, chief counsel for the association, said in a statement.
I found Clayton’s comment almost laughable. The bankers saying the prototype could be shorter? This coming from an industry that is notorious for using dense language to explain the terms and conditions for getting credit.
Clayton also said, “For more than 20 years, the banking industry has strongly supported efforts to provide consumers with a short, easy-to-understand summary of their credit-card agreement.”
And yet here we are, still trying to find a simple way to inform consumers about their credit cards. It was concern about unfair credit terms — for example, credit issuers hiking interest rates for any reason or piling on fees — that led to the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, a sweeping reform that banned a number of industry practices.
But Clayton is right about one thing. The CFPB prototype is a good first step. However, it still contains some complicated explanations. And consumers have to go to a separate Web page to get definitions of terms or to order a free printed copy.
Here is some of the proposed language in the bureau’s simplified agreement: “Your APRs are variable, except (excluded rates). They increase or decrease with the prime rate. From the (day) of each billing period, we apply APRs based on the prime rate published x business days before the end of that period. To determine your APRs we add to the prime rate: x percentage points for purchases after (period), x percentage points for balance transfers, x percentage points for cash advances, and x percentage points for the penalty interest rate.”
Specific numbers would be filled in, but do you see what I mean? The language is plain, but how a cardholder’s APR may be calculated is still complicated. Yet it’s not the fault of the bureau, which I think did the best it could with what it had to work with.
The wording and definitions needed to explain credit agreements can be simplified only so much because credit-card contracts are inherently convoluted.
Last year, the Federal Reserve began requiring card issuers to provide cardholders — in addition to their multipage agreements — a one-page summary of the key terms in their contracts. “If the goal is for people to understand the terms of their credit-card agreement, the easiest way is to improve the existing one-page summary of the agreement,” said Nessa Feddis, vice president and senior counsel for regulatory compliance at the ABA.
A 2010 study by J.D. Power found that many cardholders don’t understand how their cards work. Only one-third said they “completely” understand what they are getting into. The marketing company also looked at the online consumer conversations that consumers have about their credit cards. Many view their relationships with credit issuers as a game of “cat and mouse,” with each side trying to outsmart the other, the company said.
The ABA said it was looking forward to working with the consumer bureau “to ensure disclosures provide exactly what our customers need and want to know.”
The statement reminded me of a quote from Eleanor Roosevelt, who said, “A little simplification would be the first step toward rational living, I think.”
I think the simplest and most rational thing is for most people to use credit as little as possible. Certainly, don’t charge anything you can’t pay off before the next billing cycle. However, if you are going to use a credit card and revolve the debt, understand that this is the lenders’ game. They created the rules and, for far too many consumers, the rules will never be simple enough.
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