Credit Card Agreements Get Simplified

February 1, 2012 1:08 am

While managing your credit is a critical task for every consumer and would-be homebuyer today, credit card companies often make that difficult to do. The average credit card agreement is a sea of confusing legalese with essential information, such as costs, features, and terms of the product, virtually impossible to discern.

To combat this issue and prevent consumers from heading into detrimental credit card contracts, the Consumer Financial Protection Bureau (CFPB) has created a prototype credit card agreement that is shorter, written in plain language, and explains key features upfront. This agreement is part of the CFPB’s broader effort to protect consumers, Know Before You Owe.

According to the CFPB, 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. While the Credit CARD Act of 2009 helps protect consumers from unsavory cost practices, two-thirds of cardholders still 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.

The CFPB’s prototype is based on four key areas of improvement within credit card agreements:

Length: The industry average for a credit card agreement is currently about 5,000 words; the CFPB’s prototype comes in at a substantially reduced 1,100 words.
Language: 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 Appeal: The simplified agreement explains the prices, risks, and features of the credit card upfront, as opposed to burying it in fine print.
Consistency: The prototype establishes standard definitions for legal terms like “card” and “balance transfer” that are contractually necessary but largely uninformative to consumers. These definitions are based on standard industry usage and practices and will be housed online 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. According to the CFPB, doing this allows for a plain language document that clearly explains to consumers how the credit card works.


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