Credit card APR disclosure rule change proposed

Credit card reform: The fine print of proposed changes to Regulation Z

By Connie Prater

The Federal Reserve Board, as part of its wide-ranging review of credit card disclosure rules, has proposed two different approaches to the so-called "effective annual percentage rate (APR)" -- the amount of interest credit card users actually pay after factoring in finance charges such as cash advance fees and balance transfer fees.  This "effective APR" is much higher than rates typically advertised for credit cards. Creditors say consumers don't understand the effective APR, that it's hard for creditors to explain, and that it's "inherently inaccurate." 

45 days' notice Fixed rates APR disclosures Fee disclosures Account opening disclosures Periodic statement disclosures Changes in credit card terms Minimum payments Subprime credit cards

Regulators propose eliminating the "effective APR" or replacing it with a so-called "Fee-inclusive APR." This new type of APR disclosure breaks out "Interest Charges" and "Transaction or Fixed Fees," so you can see what the "Fee-Inclusive APR" is for that billing period. In researching this provision, the board discovered that consumers "more quickly and accurately determined the total dollar cost of credit for the billing cycle when a total dollar amount of fees for the cycle was disclosed."

Lenders agreed that the effective APR should be axed, but said the alternative fee-inclusive APR wasn't any better. "We do not believe the proposed fee-inclusive APR would solve these fundamental problems ... " Citigroup says. Read more (Page 12)

Adds Visa on the fee-inclusive idea: "This proposed alternative would likely produce more complex and confusing disclosures and would not be meaningful to average consumers ... ." Read more (Page 7)

Malcolm Bush, president of the Woodstock Institute, a Chicago-based policy research organization, says his group strongly opposes eliminating the effective APR: "If consumers are confused by the effective APR, the solution is to improve the disclosure, not eliminate it ... ." Read more (Page 5)

APR disclosures
Consumer testing told the Federal Reserve Board that consumers prefer to have the various annual percentage rates (APRs) broken out by type. To see the difference between current practice and the proposals, take a look at the "Applications and Solicitations" sample disclosure form under the existing regulations and compare it to the one the Fed proposes.  Note that in the old disclosure, there is little information on each APR other than the rate and the words "See explanation below*" after the penalty rate.  The asterisk is supposed to send consumers searching elsewhere in the disclosure document for another asterisk and the explanation of the penalty rate.

That won't do under the proposed disclosure rules. Regulators found that "many consumers did not notice the information about penalty pricing when it was disclosed outside the table." The proposal dictates such disclosures be included inside a table. The new disclosure also uses the words "Penalty APR."  That's because "testing demonstrated that some consumers are confused by the term 'default rate.' " 

Credit card owner Brian Gallagher tells the Fed: " ... (I)n their statements, credit card companies should also include what activities will trigger the percentage rate to decrease ... ." Read more  

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Published: December 26, 2007

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