Credit Card Crash-Test

By Tim Westrich
From the Center for American Progress
Thursday, March 13, 2008; 12:00 AM

Every day, average American families' financial health is challenged on all fronts: fewer job opportunities, declining home values, and rising prices for necessities like health care, education and child care. With the prospect that gas could approach $4 per gallon this summer, many Americans' budgets will reach a breaking point. Too many families are only a layoff or medical emergency away from financial ruin.

In the face of these financial challenges, credit cards offer a convenient pressure valve for cash-strapped families. But the Government Accountability Office says that the largest banks' credit card agreements are written at a reading level that 50 percent of Americans don't understand; it's clear that something needs to be done to ensure that owners are aware of the terms of their credit cards.

Today, 58 percent of credit card holders carry balances every month, and 35 million card holders can only afford to make the minimum payment each month. At this rate, it could take years to pay off this debt -- especially for the 35 percent of active cardholders who pay late fees or over-the-limit fees.

Americans who want to use credit cards responsibly -- and to cost-shop among credit card offers for the best value -- currently have a difficult time understanding the terms of their credit cards. In short, we need to find ways to cut through the legalese of credit card agreements. Congress should require credit card companies to rate the financial safety of their credit cards in the same way that car companies now have to rate the safety of their cars and trucks.

Congress today requires car companies to assess new cars with a one-to-five star rating on front- and side-car impacts. Forty years ago, when this idea was first proposed, the death toll on American roads was rising, and Congress wanted car companies to explain all the deaths. Detroit automakers gave assurances that the problem was not their product but rather "the nuts behind the wheel." Congress wasn't buying it. Instead, they told car companies they needed to create a better product, and in 1979 it required car companies to adhere to the New Car Assessment Program.

Initially resistant to this rating system, car companies now proudly display their ratings prominently on window stickers. This is exactly what we should now require credit card companies to do with their products. Congress could provide some much-needed clarity for credit card holders by crash-testing the credit cards in Americans' wallets.

Senator Ron Wyden (D-Ore.) has introduced the Credit Card Safety Star Act, which would let the Federal Reserve judge each credit card on a scale of one-to-five stars, with five being the safest for consumers. Such an approach was also published in the 2006 Center for American Progress report "Safety Sells." If a credit card agreement is written in legalese, then the card would receive a low rating. If the card's agreement and other documents offer clear, easy-to-understand terms, then they would receive a high rating. And this system does not preclude additional legislation that would eliminate features that may be considered abusive or unfair.

The credit card ratings would be prominently displayed on each card, and on applications and billing statements. The result: Instead of reading through incomprehensible gobbledygook to cost-shop for credit cards, Americans could refer to a simple system to make responsible decisions about the products.

This bill would also make the marketing of credit cards more straightforward. Currently, the more befuddled we are about credit cards, the more credit card companies can increase the "price" to use their product through penalty fees and bumped-up interest rates. The safety ratings system would turn this practice on its head. The companies with the safest cards would be rewarded as consumers switch to their products.

If history is any guide, this will happen. Under the New Car Assessment Program, the number of five-star rated cars for driver's side tests jumped from just 3 percent of the cars tested in 1979 to 57 percent of cars tested in 2006.

For many Americans, this reform couldn't come sooner. As noted in the Center for American Progress report "House of Cards," inflation-adjusted credit card debt has accelerated rapidly between April 2006 and December 2007 -- the same period that growth in mortgages was slowing. With the costs of almost all necessities going up -- gas, education, health care, child care -- more and more Americans have to use plastic to stay afloat.

The government can't keep Americans from acting irresponsibly with their credit cards. But it can set up a system that would ensure that every American who works hard and play by the rules can access the financial services necessary to get ahead.

Tim Westrich is a research associate at the Center for American Progress working primarily on the Economic Mobility Program.

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