Credit card agreements still mostly unreadable

Months after card agreements were publicly posted, a few show improvements

If you've had a hard time reading your credit card agreement in the past, it probably isn't any easier to plow through the fine print now.

A analysis of how difficult or easy it is for the average American to read and understand a credit card agreement shows some of the worst contracts have improved somewhat in the past few months but are still too complex for the average consumer. Readability Study finds major card issuers' contracts unreadable by most Americans
In a follow-up to its July 2010 credit card agreement readability study, looked at the 20 most difficult to read and the 20 wordiest contracts to see if any had improved between July and October. Only six of the 20 most difficult-to-read contracts showed improvement. Nine of the 20 had the same reading level, three were more difficult to read and two were no longer offered by the credit card issuer. All were still rated at the 12th grade reading level or higher -- too difficult for four out of five adults to understand.
That's the key finding of a follow-up to our July 2010 analysis of the readability of all major U.S. credit card agreements. For this follow-up, we looked again at the worst offenders -- the ones we had identified in July as most difficult to read and the wordiest contracts. The goal: to see if the most recent of the contracts submitted to the Federal Reserve each quarter were any more readable than the first batch. (See methodology.)

Under the Credit CARD Act of 2009, major credit card issuers in the United States are required to submit copies of their credit card agreements to the Fed, which must post them to the Web.

The July analysis found that the initial contracts submitted to the Fed required a 12th grade reading level on average to understand. The average American adult in the United States reads at only the ninth grade level.

Although consumer credit counselors advise cardholders to be sure to read and know the terms of their credit cards, four out of five adults don't read well enough to understand the average credit card agreement.

In the follow-up analysis, many of the worst agreements showed improvement -- meaning new contracts submitted to the Fed and analyzed with the same readability software programs were slightly better than earlier versions of the contracts. However, all were still tough reading for average adults.

"The reason these agreements are typically complex is that they have lots of hidden fees and traps," says Josh Frank, a senior researcher for the Center for Responsible Lending, a North Carolina-based consumer group. "What's in the complexity can cause the consumer problems ... can do them financial harm."

Safer credit cards
The National Consumer Law Center identified simple terms and clear disclosure as one of the top 11 features of a "safer credit card" in a report issued Nov. 18, 2010. "The terms must be simple enough and disclosed clearly enough that they are likely to be noticed and understood by the vast majority of cardholders," according to the report.

Consumer groups are hoping that the new Consumer Financial Protection Bureau -- currently being organized by former Harvard law professor Elizabeth Warren in the U.S. Treasury Department -- will make clarity and simple credit card terms one of its first tasks. However, the agency won't likely be up and fully functioning until late 2011. So, consumers shouldn't expect to be able to speed read through their credit card agreements any time soon.

The reason these agreements are typically complex is that they have lots of hidden fees and traps.

-- Josh Frank    
Center for Responsible Lending    

"Elizabeth Warren is putting a focus on complexity in card agreements," Frank said. "I expect that there will be some change there, but it's hard to say how soon. I would expect it in the long term."

Frank conducted a different kind of analysis of credit card terms, but came to the same conclusion about complexity. "Numbers Game," published in October 2010, analyzed the total number of numeric figures contained in typical credit card offers as a measure of the complexity of the deals. They found that between 1999 and 2009, the complexity of terms offered in the Schumer Box -- a table that summarizes terms of the credit card offer -- rose by 250 percent. However, the complexity began to decline in 2010 after the bulk of the CARD Act reform provisions took effect.

Frank said the days of hidden fees and terms aren't likely over. "In the long term, I think there will be other tricks to look for," he said.

Language doesn't matter?
Nick Bourke, director of the Pew Safe Credit Cards Project, which is conducting ongoing research and monitoring card industry practices, acknowledged that the new credit card reform law has benefited consumers by preventing credit card issuers from hiking interest rates "at any time for any reason."

"Even if the language is still complicated, what's behind the language is a little bit more straightforward," he said. If agreements are written in simple language, that doesn't guarantee that the terms are fair, Bourke said. "If they say, 'We will credit your incoming payments in a way that is suitable to the banks,' those are pretty simple words." Previously, banks and credit unions would put monthly payments toward balances with the lowest interest first. This meant consumers paid more in interest on balances with higher rates. That practice, known as payment allocation, is now banned by the CARD Act. Credit card issuers must now apply any amounts in excess of the minimum monthly payment to balances with the highest interest rates first.

Bourke said the language in the credit card agreement "has become a little less important because the products themselves are a little safer. A lot of that old language was masking practices that were difficult to understand and harmful."

Worst contracts haven't gotten much better reviewed the 20 most difficult reads and 20 wordiest contracts from July and compared them with contracts for the same cards published by the Fed in the third quarter of 2010. Six of the 20 most difficult-to-read contracts showed improvement; nine of the 20 were rated the same readability level as previous versions -- often because they were the same contract. Only three contracts were worse. Two of the 20 agreements were no longer listed in the Fed's database, an indication that the credit cards were no longer offered by the issuer.

A GTE Federal Credit Union agreement topped the list of the most difficult to read contracts in July. That agreement required 18.5 years of education to understand. The lender swapped that agreement out for another contract that was rated 16.2 years -- a 12 percent improvement, but still very high.

A Compass Bank agreement that ranked fourth on the list of unreadable contracts got a makeover. According to Ed Bilek, senior vice president and director of external communications for BBVA Compass Bank, which owns Compass, it was no accident that the same contract given a 17.5 reading level in the first analysis scored only 12.7 in the follow-up review.

"It was deliberate," Bilek said, adding the company began re-tooling its contracts in 2009 after passage of the CARD Act. He acknowledged that the 12.7 grade level rating is "still too high" and said the bank is continuing its efforts to simplify terms for its customers. The re-writing that began in 2009 continued in 2010 with further tweaking of language.

"Part of that was redoing our disclosure in our credit card agreement with the idea in mind that we tried to make it much easier to read and understand," Bilek said. "The two traits that we believe should be in every product are transparency and simplicity."

He added: "We talk to our customers quite a bit about our products. We ask them, 'You read it. Did you understand it? Is it easy?'"

More brevity
There was clear evidence of editing for brevity on several of the wordiest contracts. Among the 20 wordiest agreements from July, three out of four (15 contracts) had been shortened, according to the readability software program.

The average agreement analyzed in July ran 3,771 words. A contract for Fifth Third Bank topped the list of wordiest among the more than 1,200 agreements reviewed in July. The program determined that contract had 20,799 words spread over 19 pages. The updated agreement was more spartan, however. It contained only 14,406 words in 15 pages. Both old and new agreements required 15 years reading level. Note: Because the software program deletes words that are contained in headlines, bulleted lists and subtitles, the actual number of words in the agreement are higher.

For comparison, the original U.S. Constitution contains only 4,018 words. William Shakespeare's shortest play, "The Comedy of Errors," has 17,858 words.

... We tried to make it easier to read and understand.

-- Ed Bilek    
BBVA Compass Bank spokesman    

A GE Money Bank retail credit card for Dick's Sporting Goods stores got a major rewrite. It dropped from 11,000 to about 2,000 words -- and from a college reading level (15 years) to a ninth grade reading level, according to the analysis. Similarly, a BrandsMart department store retail card, also issued by GE Money Bank, underwent a dramatic improvement between the first and second analysis. Previously, the agreement contained more than 11,000 words and required 15 years of education to read. The new version contained 1,900 words written at the ninth grade reading level.

Banking industry representatives say contracts are written the way they are because federal and state banking laws require them to make certain disclosures about the cards. They deny that the agreements are deliberately written to confuse consumers.

Some banks and credit unions, however, do manage to satisfy legal requirements without dense language. In our July analysis, we identified the 10 easiest-to-read contracts. All were from credit unions. They were written at less than a seventh grade level.

Experts say most credit card holders don't bother reading their entire contracts. It's no wonder -- the documents are tough reading even for consumer attorneys and people with advanced degrees. Frank, the responsible-lending group researcher, who has a doctorate degree, said he struggles through some passages in the documents: "I have to focus to really understand it."

Lenders are required to send the agreements when new credit card accounts are opened or if a consumer requests a copy of their contract. See how to get your credit card agreement .

Frank said the issue is whether the densely worded fine print in the credit card agreement is fair to consumers.

"It's supposed to be an agreement between two parties," he said. "If it's too complex for one party to ever read or understand, then is it really an agreement as opposed to something that's imposed on you?"

The methodology: How we did it copied the list of more than 1,200 credit card agreements posted on the Federal Reserve Board's website. Under the Credit CARD Act of 2009, all U.S. credit card issuers with more than 10,000 credit card accounts must submit their agreements to the Fed every quarter as well as post them on their own company websites and make them available to account holders who request them. The Fed launched the site on May 24, 2010, with the initial list of credit card contracts. The site was updated in October 2010. New contracts were added and some deleted from the list, while others remained unchanged.

Every credit card agreement posted on the Fed's website as of May 24, 2010, was evaluated by two readability programs that were purchased from Micro Power & Light Co., a Dallas software development company.

The first program prepped the content by deleting special characters, incomplete sentences, tables and any special coding that may have been in the text versions of the files. The second program scored the text using three different well-established readability formulas: the Flesch reading ease, Flesch-Kincaid grade level and FOG (Frequency of Gobbledygook) indexes. Only one of the formulas, the widely used FOG score, was used in determining the best and worst credit card agreements and average reading level of a U.S. credit card agreement.

We removed Spanish contracts that were included in the Fed's database. In some instances, credit card issuers included both Spanish and English text in their contracts. We deleted any Spanish text and ran the readability formulas on the remaining English content.

Some files posted on the Fed's website were not credit card agreements but rather supplemental materials that often accompany agreements, such as tables listing interest and penalty rates and fees or information about credit card or disability insurance. In some instances, they were credit card applications. Those files were not scored for readability.

A small number of contracts were not evaluated for readability because the text versions of the agreements were either empty or did not reflect what was actually in the agreement.

Because the computer program that prepped the contracts removed headlines, incomplete sentences and special characters, it also removed words from credit card agreements. Therefore, the total word count reflected in the results is less than the word count derived by putting the contracts into a word processing program.

In the second analysis, conducted in October and November 2010, we looked at the worst contracts (the 20 most difficult to read and the 20 wordiest) from the original filings and compared them to agreements for the same card products posted in the second batch of filings to the Fed's website.

See related: U.S. credit card agreements unreadable to 4 out of 5 adults, A guide to the Credit CARD Act of 2009

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Updated: 08-17-2018