America’s newest consumer advocate has a lot on her plate. Last week, President Obama tapped Harvard professor Elizabeth Warren to set up the federal government’s new Consumer Financial Protection Agency.
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In her first interviews after the appointment, Dr. Warren said credit cards are a top priority. She wants cardholder agreements to be shorter and easier to understand.
“My dream is the two page credit card agreement where you can see the terms, where you can compare one with another with another and know how much they cost and make real comparisons,” Warren told NBC News anchor Brian Williams. “This is to fix the problem of the tricks and the traps and not being able to make comparisons, not being able to get the market working for you.”
I think the credit card industry was a little surprised Warren focused on them, since both Congress and the Federal Reserve recently forced major changes in the way they do business.
“We agree about simple credit card disclosures,” says Nessa Feddis with the American Bankers Association. “We strongly support the rules that took effect in July which require card companies to provide a one-page summary of the agreement both with the application and with the card.”
This summary page was developed by the Federal Reserve based on consumer testing. Bankers say it gives consumers the information they want in a format they like: one that is easy to read and understand.
Consumer groups like this standardized disclosure form. But they still want the entire card agreement overhauled because the contract spells out many things – including rights and responsibilities – not on that summary page.
“The contracts are complicated, they’re written at a high grade level, much too high for your average consumer,” says Lauren Bowne, a staff attorney with Consumers Union (publisher of Consumer Reports). “It’s essential that a consumer be able to read relatively simple contracts so they can compare the terms for different cards before they sign up.”
Words, lots and lots of words
Credit card companies are now required to give their contracts to the Federal Reserve Board which posts them on its website. Earlier this year, CreditCards.com hired a team of researchers to analyze those contracts (more than 1,200 of them) to rate their readability.
Their conclusion: 4 out of 5 American adults cannot read the average credit card agreement. The average credit card agreement, the study found, is written at the 12th grade reading level. But the average adult in this country reads at the 9th grade level.
According to the study the average credit card agreement has about 3,700 words. The wordiest agreement – for MasterCard and Visa cards from Fifth Third Bancorp – had 20,799 words. That’s longer than Shakespeare’s “The Comedy of Errors” which uses a modest 17,858 words.
“It’s unnecessary,” says Ben Woolsey, CreditCard.com’s director of marketing and research, who tells me he was surprised by the results. “These agreements are too long and too difficult to read.”
Woolsey says it is actually easier for the average American to read a California real estate purchase agreement or a chapter in the King James Bible than the average credit card contract.
CreditCard.com found GTE Federal Credit Union’s cardholder agreement was the toughest to read, requiring a reading level equal to six years of college.
Here’s some good news: a large number of banks that now provide agreements written at or below that 9th grade reading level. They include U.S. Bancorp (8.9 years), Bank of America (9.0), Barclay’s Bank Delaware (8.1) Citibank (8.2), American Express Bank (8.1) and Capital One Bank (7.3).
Nick Bourke, director of the Safe Credit Cards Project at the Pew Trust, says credit card disclosures have come a long way. But he believes more needs to be done, “so most consumers, not just Harvard lawyers can understand them.”
Does it really have to be this way?
Look at this one paragraph from a cardholder agreement. Can you figure out what it means?
Periodic Finance Charges. Periodic Finance Charges are computed by multiplying the Average Daily Balance for each category of transactions shown on the billing statement (e.g., purchases, balance transfers, cash advances) by the applicable Daily Periodic Rate and then multiplying the result by the number of days in the billing cycle. To calculate the Daily Balances, we take the beginning balance for each category of transactions each day, add any new transactions, any previous day’s periodic Finance Charges, any assessed fees and charges, and subtract any payments and/or credits and we make any necessary adjustments. If a transaction posts after the beginning of a billing cycle, but the transaction occurred prior to the beginning of that billing cycle, the applicable Daily Balance and any related Finance Charge calculations may be adjusted retroactively to include the transaction amount as of the transaction date. Then, for each transaction category, we add the Daily Balances for the billing cycle together and divide the total by the number of days in the billing cycle. This is the Average Daily Balance for each transaction category. We may use mathematical formulas which produce equivalent results (including rounding or truncation) to calculate the Average Daily Balance, Finance Charge, and related amounts. For example, we may utilize computer programs or other computational method that are designed to produce mathematically equivalent results while using fewer and/or simpler computational steps than are described in this Agreement. If the balance for any day is less than zero we treat it as zero.
This is what Roy Peter Clark, an expert on writing and author of the book “The Glamour of Grammar,“ calls dense prose.
“Dense prose is used to confuse,” he says. “It’s long sentences. It’s words which are not common everyday words, but which are either legal terms or business jargon. It leaves you scratching your head. What are they asking me to do? What’s really important for me to know?”
My two cents
People need to be able to understand the complete contract between themselves and the credit card company. In too many cases, they can’t do that right now.
My friend, Gerri Detweiler, the personal finance advisor at Credit.com, has been reading credit card agreements for 20 years. She readily admits she can barely understand them. That’s just crazy!
I applaud the banks that have reworked their card agreements to make them shorter and easier to understand. I hope Elizabeth Warren and the Consumer Financial Protection Agency can force every bank to do this.
I also hope Warren has many other kinds of contracts on her “to do” list. Leases, rental agreements, insurance contracts, and mortgages all need to be cleaned up. And quite frankly, most of them should probably move to the top of the list. When compared to credit card contracts, they are at least as bad and probably much worse.
The bottom line: It’s time to end the word games and use plain English in all consumer contracts. These documents can no longer be used to confuse. They must say what they mean – simply and clearly.
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