Credit card offers have grown increasingly complicated since
2000, when Congress required issuers to start disclosing pricing information on
monthly billing statements. But new research from the Center for Responsible Lending (CRL) finds that instead of providing clarity to consumers about the
true cost of their credit cards, issuers responded by adding a confusing array
of numbers to their offers
Specifically, CRL's research finds that numbers in credit
card direct-mail offers increased 250 percent from 1999 to 2009, and at the
peak in early 2009 the average credit card summary contained 33 figures. Much of the increased complexity in offers
came from new penalty rates and fees.
CRL also finds that offer complexity varied widely among
issuers: in most years, the most complex offer had six-to-eight times as many
numbers as the simplest offer. This suggests
that it has been issuer choice -- not regulation -- that has made credit card
terms more confusing.
The Credit Card Accountability Responsibility and Disclosure
(CARD) Act of 2009 appears to have made credit card contracts clearer, suggesting
the law is having the intended effect of creating fair, understandable terms.
But credit card pricing remains far more complicated than
just a decade ago, thwarting consumers' ability to comparison shop. Regulators
must monitor industry practices carefully to determine whether more action is
needed to enhance clarity.
The CRL analysis focuses on the "Schumer Box" -- a key
summary of terms within each offer. This disclosure, which summarizes costs to
the consumer, contains the information most likely used when selecting a credit
card. It does not include all card terms, but rather is intended to summarize
the most important terms for consumers.
The general structure and the type of information that must
be included in the Schumer Box are mandated by law that became effective in
2000 in legislation sponsored by then-U.S. Congressman Charles Schumer.
However, the law does not mandate or necessitate complex
disclosures. Rather, the complexity of disclosures is a function of choices made by a
Numbers, numbers, numbers
The average credit card offer's summary of terms had 33
figures at its peak in 2009. The most complex summary of terms analyzed had 55
numbers, while the simplest summary of terms had just five numbers.
In the peak period of May 2009, the number of numbers in a
summary of terms varied considerably, from 14 to 48. In many periods, the most
complex offer had more than six times as many numbers as the simplest.
Complexity of terms
Summary term complexity rose 250 percent between 1999 and
the peak period in 2009, but declined 23 percent after implementation of key
provisions of the CARD Act of 2009. The average number of numbers appearing in the
Schumer Box grew by 250 percent from 13 numbers in 1999 to a peak of 33 numbers
In 2010, after the Credit CARD Act, the complexity of
contracts declined by 23 percent to an average of 26 numbers. A notable drop in
offer complexity was observed after the CARD Act. Most of this has been due to
simplification in Annual Percentage Rate (APR) terms.
The sources of complexity shifted from 1999 to 2009, with
the latter year having a greater portion of numbers related to penalty fees and
to APR. In 1999, 41 percent of numbers were related to APR, while 16 percent
were related to penalty fees. In 2009,
46 percent were related to APR, while 25 percent were related to penalty fees.
The absolute level of numbers increased for all categories between 1999 and
After implementation of most provisions of the Credit CARD Act,
41 percent of numbers were related to APR, while 27 percent were related to
penalty rates. However, even as the proportions of these figures remained more
or less level over the implementation of the CARD Act, they were associated
with an appreciably lower absolute count of numbers than was the case before
Too much info
Each number in a credit card offer can generally be
considered a dimension of price. All of these price dimensions must be
considered simultaneously so that a consumer can make the best decisions
regarding his or her credit cards.
There is evidence that consumers cannot grasp anything close
to 30 dimensions simultaneously when making a decision, with previous research
suggesting the number may be closer to seven. With a typical credit card offer
and average processing capacity on the part of the consumer, over 75 percent of
the price information will not be fully taken into account.
If a consumer is comparing offers, this quickly multiplies
the number of dimensions involved. For example, if a consumer is comparing
three credit card products, just looking at the introductory rate, the length
of the introductory rate, and a single long-term purchase rate for each offer
results in nine numbers. This already stretches the consumer's cognitive
capacity. Consumers often make their best effort to comparison shop, but end up
frustrated in their attempt to find the cheapest product.
Why do most issuers put so many numbers in their offers?
Complexity in disclosures is a direct result of credit card issuer choices. In
most years, the most complex offer had six-to-eight times as many numbers as
the simplest offer. Both of these offers existed in the same regulatory
environment. The difference was the complexity of the underlying product.
The Credit CARD Act appears to have reduced the complexity
of credit card contracts, supporting the contention that the law is having its
intended effect of creating more understandable and predictable credit card terms. However,
credit cards still remain far more complex in their pricing than they were just
a decade ago.
Price complexity can lead to a less competitive market by
thwarting a consumer's ability to weigh all factors when comparing prices
simultaneously and accurately. CRL recommends the trend toward more complex
credit card offers should be monitored by regulators.
Complexity is down since Credit CARD Act implementation, but
it is still higher than the complexity of offers just five years ago. More
reform or rulemaking action by regulators may be warranted if complexity
continues to stay high, CRL believes.
Issuers are well aware that there are limitations to
consumers' ability to attend to every detail of highly complex disclosures. The
less scrupulous among them will give what seems a great offer with a prominent
headline interest rate, while making up for it by using a variety of other fees
and prices less obvious to the prospective cardholder. Consumers should not be
deceived by this tactic.
It may be too difficult to weigh and compare all the prices
and fees at once, so CRL recommends consumers choose the simple and transparent
over the deal that looks too good to be true
In the end, consumers likely will be better off with straightforward, honest pricing systems than with a 0 percent introductory offer that comes with considerable price changes and fees down the line.