The Consumer Financial Protection Bureau (CFPB) is launching a "Know Before You Owe" project aimed at simplifying credit card agreements so that the prices, risks, and terms are easier for consumers to understand.
The CFPB is asking the public to weigh in on a prototype credit card agreement that is shorter, written in plain language, and explains key features upfront. The CFPB also plans to pilot test the prototype with Pentagon Federal Credit Union, one of the largest credit unions in the country, to get on-the-ground consumer feedback.
“Credit cards can be complicated, with many moving parts that impact the cost to consumers,” said Raj Date, the Special Advisor to the Secretary of Treasury on the CFPB. “When a consumer has to read through pages of legal fine print in their credit card agreement to figure out how their card works – it’s easy to get confused. With a short, simple, easy-to-understand credit card agreement, consumers can clearly see the terms of the deal and make the decisions that are right for them.”
There are an estimated 514 million credit cards in circulation in the United States. Americans used their credit cards to spend an estimated $1.9 trillion in 2010, and credit card debt is estimated at $700 billion dollars.
The CARD Act, which was signed into law more than two years ago, made credit card costs more reliable – with less risk of unexpected rate increases or other charges.
But despite this progress, a recent study by J.D. Power found that roughly two-thirds of cardholders say they don’t completely understand how their cards work. And, as indicated in a recent CFPB report on credit card complaints received by the Bureau from July 21 to October 21, 2011, difficulty understanding the terms of their cards is a contributing factor in many consumer complaints.
Credit card agreements – contracts that consumers receive when they sign up – include information about the costs, features, and terms of the product. But while some companies have made improvements, agreements are often long, complicated, and written in legalese. Key information about interest rates, fees, billing, and payments is often surrounded by legal fine print.
Designed to make it easier for consumers to understand their credit cards, the CFPB’s prototype is:
- Short: The CFPB’s prototype is shorter – its word count is about 1,100 words, while the industry average for a credit card agreement is around 5,000 words.
- Clear: The draft credit card agreement has an easy-to-read layout and is written in plain language. It is organized into three simple sections: costs, changes, and additional information.
- Consumer-Friendly: The simplified agreement explains the prices, risks, and features of the credit card upfront, not buried in fine print.
- Consistent: The prototype establishes standard definitions for legal terms like “card” and “balance transfer” that are contractually necessary but largely uninformative to consumers.
The prototype credit card agreement separates important information about prices, risks, and terms from the legalese by taking much of the legal language and moving it into standard definitions.
In the prototype, the definitions have been formulated by the CFPB based on standard industry usage and practices. To ensure that consumers can easily find these definitions, they will be housed online in a place where consumers can readily access them.
For consumers who do not have Internet access, the definitions will be available from their issuer in printed form. Doing this allows for a plain language document that clearly explains to consumers how the credit card works.
In addition to introducing the draft simplified agreement, the CFPB will host an online database of many existing credit card agreements where consumers can compare their existing agreement with the prototype.
The CARD Act required credit card issuers to provide copies of their credit card agreements to the Federal Reserve so it could maintain a database for consumers. The Dodd-Frank Wall Street Reform and Consumer Protection Act transferred responsibility for this database to the CFPB.
For more information about Know Before You Owe, and to view a copy of the prototype credit card agreement and the database, visit the CFPB’s website.