Rep. Judy Biggert, an Illinois Republican who is ranking minority member of the House Subcommittee on Financial Institutions and Consumer Credit, applauds efforts to increase education and recommends against limiting the financial industry's ability to collect fees. "We just need more personal responsibility," she says. "It's sad that people don't take financial education as [seriously] as other things, because it [determines] whether they will be successful or lose money to fraud."
The banking industry, not surprisingly, agrees with her. "The real heart of the issue is financial literacy and the ability of consumers to make choices that work for them," says Ken Clayton, the American Bankers Association's managing director and senior vice president for card policy. If consumers knew more about credit and how it functions, they would use it in a more responsible way that worked for them, he says.
Lessons. Experts outside the finance industry are often more skeptical of the power of education, and with good reason: Research suggests that many of the lessons are not having their intended effect. "The very disappointing result . . . is that people exposed to financial education don't do any better," Lusardi says. One study followed up with graduates five years after they took a respected personal finance course; it found the course had an insignificant impact on their behavior.
Such findings have led lawmakers and experts to argue that it is the financial industry, not American consumers, that needs improvement. "The issue is not financial literacy. It is the byzantine structure that the companies have set up, and we need to focus on that," said Rep. Keith Ellison, a Minnesota Democrat, at an April hearing on credit card reform.
Princeton's Blinder suggests structural changes, such as creating laws to penalize the mortgage industry for selling products to people for whom they don't make sense, just as stockbrokers are now under suitability standards. He adds that banks could be required to keep a certain percentage of the mortgages they originate on their own books instead of selling them to third parties, so they would have an incentive to screen borrowers more carefully.
In their book Nudge, Thaler and law Prof. Cass Sunstein suggest designing financial and other programs to help guide people toward smart choices without limiting their options. They call their approach "libertarian paternalism." Thaler and Sunstein recommend automatic enrollment in retirement savings plans, which research shows increases and speeds participation in workplace programs. And they advocate allowing consumers to sign up to save more money each time they get a raise, which boosts savings rates. Just by using the term "minimum payment," the authors say, credit card companies suggest that it is an "appropriate" amount to pay, even though it's usually just a fraction of the total bill and paying it maximizes interest payments. Their solution? Companies should allow automatic payment of the full amount due.
Limits. Susan Wones, 46, of Denver, seemed to be asking for a version of this libertarian paternalism when she testified on behalf of consumers at a recent hearing on Rep. Carolyn Maloney's legislation to create a cardholder's "bill of rights." Wones expressed frustration that her card company, Chase, had approved her purchases even after she went over her credit limit, triggering a fee and an interest rate hike. She had assumed charges would be denied as soon as she reached her $2,000 limit. (Chase says that most customers appreciate the ability to go over their credit limit but that consumers can request to have such charges denied.)
Thaler says that credit card companies, for example, could apply his and Sunstein's approach by asking consumers whether they want to be able to exceed their credit limit (for a penalty) or if they would prefer the charges be denied. "Then people would be aware of what they were getting into," he says.