Financial watchdog unveils prototype of simpler credit card contract
Federal agency seeking public input on two-page credit card agreement
The new federal consumer financial watchdog agency is taking steps to take the confusion out of those long, hard-to-read credit card contracts.
The Consumer Financial Protection Bureau unveiled a prototype of a credit card agreement it says is shorter (only two pages), clearer (written in relatively plain language) and consumer-friendly (with boxes and tables to make it easier to compare one credit card to another).
"Consumers won't drown in page after page of difficult-to-understand terms," Raj Date, the agency's unofficial acting director, said during a press briefing Wednesday in Cleveland. He was there to announce a new campaign seeking public input on a kinder, simpler credit card agreement for everyone.
In his speech, Date acknowledged how prevalent credit cards are in American households and how complex they can be to understand. "That's why the CFPB has been looking at ways to simplify one source of the confusion: the credit card contract itself."
The prototype is not mandatory for credit card issuers. It is a starting point, meant to provoke discussion of ways to simplify credit card agreements, Date said.
Banks have legal concerns
Banking industry representatives called the model contract "a good first step." However, as Kenneth Clayton, chief counsel for the American Bankers Association trade group notes in a statement, the document "could be made even shorter, as well as less susceptible to costly lawsuits and the higher consumer prices that come from them."
Added Clayton: "We look forward to working with the bureau to ensure disclosures provide exactly what our customers need and want to know, while maintaining consumer access to competition and choice in the marketplace."
At least one lender, Pentagon Federal Credit Union, or PenFed as it's known, has already agreed to adopt the CFPB's prototype as a test model. PenFed is one of the nation's largest credit unions, with more than 1 million members and more than 350,000 credit card holders.
Other major credit card issuers contacted Wednesday said they had not yet decided whether to test the simplified agreements and were waiting for the results of the PenFed pilot.
Consumers Union: Make it mandatory
Consumer groups welcomed the model.
"Consumers have been waiting for this," says Lauren Bowne, a staff attorney for Consumers Union, the nonprofit owner of Consumer Reports magazine. "Consumers have been wanting clarity to help them understand the terms they are getting into with their credit card contracts ... It's a quarter if not less of the size of what consumers usually get these days ... It would be nice if it were mandatory."
Bowne encouraged consumers to contact their banks urging them to adopt the simpler contracts.
A CreditCards.com special report published in July 2010 found that the average U.S. credit card agreement at the time was written on a 12th grade reading level, well above the ability of the average American to read and understand. The average adult reads at only a ninth grade level.
The most difficult contracts analyzed in the report required advanced college degrees to understand and the simplest could be understood by a middle schooler. Although many in the banking industry contend the contracts are written the way they are to comply with state and federal laws, reading experts say the agreements need not be so densely worded and complex.
Readability software is a tool commonly used in the publishing industry to determine the ease of reading textbooks, novels and other types of writing. CreditCards.com tested the CFPB's prototype with the same readability analysis program used in the 2010 project: the aptly named Frequency of Gobbledygook (FOG) index. The prototype tested at a ninth grade reading level.
After briefly reviewing the new CFPB prototype contract, plain language expert Deborah S. Bosley called it, "About 300 percent better than what we normally have gotten in the past" from credit card companies.
"They've taken a giant step foward," said Bosley, an associate professor of technical writing at the University of North Carolina Charlotte and a principal at the Plain Language Group, a Washington, D.C., nonprofit organization that advocates for clear communication and plain language.
"What it is going to do is push banks and lenders to take a good, hard look at their agreements and come up with some new ways to illustrate this agreement," Bosley added. Her critique, however, noted that use of the glossary terms on a separate website or in a separate document was not ideal.
As Date from the CFBP explained, drafters of the prototype deliberately removed the legalese that defined terms such as "card" and "daily periodic rate," and placed them in a separate glossary of terms. That glossary is on a separate website or a printed version can be requested by customers.
Bosley says the effect may not be the clarity the agency seeks. "People have a lot of difficulty reading a definition and then going back and finding it in the original document," Bosley said. "I would prefer it be in the same place. I would rather make it three pages and include the definitions at the point where they occur."
Date says the agency wants to hear from people such as Bosley, the general public and lenders about the prototype.
"Our hope is that this thought-starter will be a resource for credit card companies," he says. "We look forward to improving it with feedback from the industry and the public. And just like credit card companies routinely test new products dozens, hundreds or even thousands of times, we look forward to testing this prototype."
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