It is often difficult for consumers to find information about when payments are due and to understand what actions will lead to a penalty. Moreover, many credit card penalties, such as late payments, come with the additional burden of an increase in the consumer’s annual percent rate, or APR, to the penalty rate. This penalty rate can reach as high as 25 to 29 percent. The average penalty rate in 2008 was 16.9 percentage points higher than the average purchase APR, or standard APR. For a household that carries the average amount of $10,678 in credit card debt, being repriced to the penalty rate would result in an additional $1,800 in interest costs per year.
One simple technological solution could help level the playing field between cardholders and credit card companies and put money back into families’ budgets. Text messages—or a similarly rapid electronic method—could allow a financial institution to transfer information to cardholders at the “teachable moment” when they need it the most. If the typical credit cardholder agreement were dissected into useful pieces, made clearer, and sent to the cardholder in real time, it would decrease the likelihood that cardholders would incur a fee. For example, a bank could automatically send a text message five days before a bill’s due date warning the cardholder that a late payment will result in a late fee and an increase in the APR. The message would include both the event—in this case the due date—and the consequence: both a fee and an increase to the penalty rate.
A text message system should not, however, be a substitute for better protection from the worst abuses in credit cards. A text-messaging program should be implemented in tandem with legislation that makes credit cards fairer by eliminating the worst credit card practices.
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