I’ve practiced law for 20 years, yet trying to a read a credit card agreement from beginning to end is like trying to finish the expanded edition of Stephen King’s The Stand. I’ve never finished, either. Well all that may change soon, at least as far as credit card agreements are concerned.
The Consumer Financial Protection Bureau (CFPB) recently released what it describes as a “shorter, simpler credit card agreement.” Launched as part of the Bureau’s “Know Before You Owe” campaign, the agreement is designed to “help consumers better understand their credit card agreements.”
I’ll let you judge how well the CFPB has met its goal. For example, the form agreement includes a section titled, “How is Interest Calculated?” Here’s the answer, according to the CFPB form agreement:
"We calculate interest using the daily balance method with compounding. This means that interest compounds daily."
"We will not charge you interest on purchases if you pay your full account balance by the due date each month. This is called a grace period. If you do not take advantage of the grace period, we will charge interest starting the day you make a purchase. If you do not pay your full account balance on time in any month you will lose your grace period until you pay your full account balance on time x months in a row. You pay interest on cash advances or balance transfers from [date]."
While I admire the CFPB’s effort to simplify what is frankly a complicated legal document, the above “simplification” makes we want to try finishing The Stand one more time.
The form agreement does include, however, tables that make understanding interest rates, fees, promotional rates on balance transfers, and rewards much easier than most agreements in use today. And it’s a lot shorter than today’s average agreement. The CFPB’s effort weighs in at roughly 1,100 words, compared with the average length today of roughly 5,000 words, according to the CFPB’s acting director, Raj Date.
The CFPB is not requiring banks and credit card issuers to use the agreement. At least one credit union, however, will adopt the agreement in 2012. Pentagon Federal Credit Union has announced its plans to use the agreement. Whether other credit card issuers will follow suit is unclear.
And then there is the question of whether it will make a difference. It seems logical that a simpler, shorter agreement will be easier for consumers to understand. And it may encourage more people to actually read the document in the first place. But then again, maybe it won’t.