Know Before You Owe: Credit Cards
Special Advisor to the Secretary of the Treasury for the
Consumer Financial Protection Bureau
December 7, 2011
Good afternoon. I would like to thank you all for coming today. Chris, I appreciate that kind introduction. I’m glad to be in Cleveland where, later today, the Consumer Financial Protection Bureau will meet with residents and local community leaders to talk about what the Bureau can be doing to help American consumers. But first, I’d like to announce an important initiative.
As most of you know, the Bureau’s mission is to help make consumer financial markets more transparent, so that they work for consumers, the responsible firms that serve them, and the economy as a whole.
Even before our official opening date, we launched a project to improve mortgage disclosures called Know Before You Owe. In our first months, we expanded that project beyond mortgages to student loans. Today, I’m excited to announce another Know Before You Owe project aimed at simplifying credit card agreements so that the prices and terms are easier for consumers to understand.
The credit card market is gigantic. Nearly 514 million credit cards are in circulation in the United States. I bet most of us have one of these three-inch pieces of plastic in our pockets right now. Credit cards represent about $700 billion in outstanding household debt. That’s more than $6,000 per household.
Now, a credit card is actually a pretty remarkable thing. It’s a device that allows consumers to make purchases which can be paid back immediately or, if the consumer chooses, can be paid back over time. It’s both a payment instrument and a way to access credit.
Consumers spend trillions a year on their cards – a large percentage of which happens this time of year during the holidays. People use them to buy everything from a cup of coffee to a car. They are an everyday part of our lives.
So credit cards can be useful and they can be important. But they can also expose you to a lot of risk – with different fees for different products and services. As a consumer, if you are going to take risks, you should know what you are getting into.
Make no mistake. The credit card market is clearly better for consumers than it used to be. The CARD Act, which was signed into law more than two years ago, banned a range of practices that hid the real cost of having a credit card. Because of that legislation, there is less risk of having your interest rate on an existing balance suddenly increase, and, you are less likely to incur expensive late fees and other penalty charges.
But, while the CARD Act did a lot of good, there is still a lot of progress to be made. Since the Bureau started taking credit card inquiries and credit card complaints four months ago, we’ve seen a real disconnect between how some consumers understand their credit card and how it actually works. This is true right from the very start, when consumers sign up for a card. That’s why the CFPB has been looking at ways to simplify one source of the confusion: the credit card contract itself.
Like all financial products, credit cards come with rights and responsibilities. And to understand those rights and responsibilities, you need to understand the contract, which, unfortunately, most people in the real world don’t have the time or legal training to actually read.
Indeed, too many of us – routinely, without a second thought – accept that we don’t understand the legal agreements that should matter in our lives. We skip over pages and pages of legal language and contract provisions and just sign on the dotted line. We click “I agree” without reading what we are agreeing to.
Most consumers don’t read their credit card agreements because they’re long, complicated, and written in dense, impenetrable legalese. They are written this way partly because credit cards are complex products with lots of different prices and fees and features. And they are written this way, sometimes, because of the card issuer’s desire to protect itself from litigation.
The result is predictable. Consumers often complain about the terms relating to credit cards – terms that, from a legal perspective, they “agreed to” by using the card after receiving the contract. According to a study by J.D. Power, two-thirds of cardholders feel that they don’t completely understand the terms of their credit card.
Some companies have made progress over the past several years in shortening their agreements, translating them into plain English and redesigning them so they are easier to read. We support their efforts in doing this. We just think there is more to be done. Some cardholder agreements take up too many pages. And some use language that is just way too complicated.
The bottom line is that many credit card agreements are confusing and most consumers don’t understand them.
At the CFPB, we talk to people from all over the country about all kinds of financial products, not just credit cards. What we know from those conversations is that Americans want to be accountable for their decisions. They feel accountable for their decisions. Americans are typically grown-up, responsible people. But in order to be responsible, they do need to know what they are getting into in the first place.
That’s why we are launching our Know Before You Owe Simplified Credit Card Agreement. It’s designed to help credit card issuers by providing a short, simple, and straightforward credit card contract.
The CFPB’s prototype – which is intended simply as a thought-starter – is short. While the average industry card agreement has almost 5,000 words, the prototype is roughly 1,100. Consumers won’t drown in page after page of difficult-to-understand terms. We have done this by taking much of the legalese – the information that is contractually necessary but too dense for most consumers – and we moved that language into standard definitions.
These definitions could be provided to consumers for reference together with the simple agreement. 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.
By doing this, we can create a plain-language document that does a much better job of explaining to consumers how the credit card actually works. What it costs in what circumstances. How and when those costs can change. What to do if there is an error on the account.
Here’s a great example of our approach: The word “card”…“C-A-R-D.” As a practical matter, we all know what it means to use a “card.” But the issuer for legal reasons wants to be sure that “card” is given a long legal definition to cover absolutely everything that the card could be: the card itself; the use of the account without the card (like when you buy something online); the use of checks written on the account, and so on.
We create a definition of “card” that covers all these bases, but moves the definitions off the agreement. If you remove all the terms in the contract that can be treated in this way, you can provide real-life consumers with a much shorter document that is far more understandable.
Our approach is flexible enough to work for almost any kind of credit card product. We simply provide a definitional framework for issuers to use if they want to.
This approach will not in any way limit the ability of issuers to compete on price, on rewards, and on other features. Quite the contrary, our approach enhances issuers’ ability to compete by enabling consumers to focus on the terms that matter – those that are likely to differ from product to product, and to inform consumer choices.
Our hope is that this thought-starter will be a resource for credit card companies. 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, even thousands of times, we look forward to testing this prototype. We realize there is a lot more science and a lot less art in developing a clear, easy-to-understand credit card contract – and we plan to put our idea through rigorous tests to make it as effective as possible.
We think banks, credit unions, and other credit card issuers are going to like our prototype. Pentagon Federal Credit Union, one of the largest credit unions in the country, with 1 million members and more than 350,000 cardholders, has already signed up to test the idea. We plan to continue to work with Pen Fed and whoever else wants to join us to make a simplified, shortened agreement an industry reality.
Now, we are ambitious at the Bureau, but we are not naïve. Changing the status quo will take a lot of time and effort and incremental steps. What we are looking for initially – with this prototype – is to provide consumers the chance to understand their contract. Given where we are currently, that would represent huge progress.
As part of this initiative, today we are also releasing a database of credit card agreements. It’s a good resource to see how your credit card contract or your prospective credit card contract compares to others. You can also compare yours to our prototype. Go to our website, ConsumerFinance.gov, to find out more.
Now, before I conclude, I just want to reiterate that the CFPB believes in creating a market that is fair, and transparent, and competitive – a market that works for everyone, consumers and lenders alike. Our Simplified Credit Card Agreement is a great example of how the Bureau can work with industry, consumer groups, and consumers to achieve these goals.
As we were developing this idea, someone on our team reminded me of what Einstein once said, “If you can’t explain it simply, then you don’t understand it well enough.” I think our work on this prototype is a great example of how it is possible to take something complex and bring it up a level – not bring it down a level – but bring it up a level to where more people have the chance of understanding it.
In developing this prototype, one key lesson we learned is that distilling a complicated consumer financial contract is not easy. But we think the effort was worth it, and that the prototype is an enormous step. Now we hope that credit card issuers, consumers, and other stakeholders will join in, and help us make it even better.
Thank you for your time.