Center for American Progress

What’s in Your Wallet? Congress Investigates Credit Card Terms

What’s in Your Wallet? Congress Investigates Credit Card Terms

A hearing in Congress this week calls for a reality check on convoluted cardholder agreements, writes Tim Westrich.

Today the House Financial Services Committee will examine how credit card holders can receive clearer information and more control over their credit card accounts. There could not be a better time for advancing these goals.

Credit card debt is accelerating. Financially squeezed Americans, without easy access to home equity, are increasingly relying on their credit cards for daily spending, as the Center for American Progress recently reported in “House of Cards.” Congress could make it easier for responsible borrowers to avoid crushing fees and surprise rate increases as they come to rely more and more on their plastic.

At Thursday’s hearing, the Committee will hear from consumers, legal and economic experts, and credit card industry representatives, and consider some options. One of those options should be a credit card safety rating system to help Americans better evaluate the terms of their credit cards, as proposed in the Center for American Progress paper “Safety Sells.

Clearer credit card terms and conditions cannot come soon enough for cash-strapped families trying to pay necessary living expenses. With family budgets squeezed even tighter by declining home values, fewer job opportunities, and the rising prices for necessities such as health care, education, and child care, credit cards offer a convenient but dangerous pressure valve. With the prospect that gasoline could approach $4 per gallon this summer, many Americans’ budgets will reach a breaking point. Too many families are only a layoff or medical emergency away from financial ruin.

Because credit card debt tends to carry substantially higher costs than other forms of credit, in part due to myriad fees, many borrowers unwittingly slide deeper and deeper into debt. An increase in defaults could lead to losses not just for the credit card lenders, but also for pension funds and investors who bought debt securitized by credit card receivables.

Americans who want to use their credit cards responsibly often do not have clear and accessible information about how their credit cards work. A 2006 Government Accountability Office report found that credit card disclosures are written well above the eighth grade level at which about 50 percent of U.S. adults read. The pages of small print disclosures may obscure, rather than clarify, what actions cause credit card lenders to raise their rates, according to interviews with cardholders conducted as part of the GAO report.

But a key part of the difficulty of understanding credit cards is that lenders often reserve the right to modify cardholder agreements at any time. Cardholders who take the time to read their voluminous cardholder agreements often find a clause to the effect of: “We reserve the right to change the terms at any time for any reason.” The lenders argue they must protect themselves, as these are open-ended lines of credit and the borrower’s situation and creditworthiness can change over time. But from a borrower’s perspective, there’s no point in trying to read and compare credit card terms and conditions when they can change with little warning.

Thursday’s hearing will consider a proposal that lenders be required to give card holders 45 days notice of any interest rate increases and the right to cancel their card and pay off the existing balance before the increase takes place. This plan takes aim at the “at any time for any reason” clause that allows lenders to change their terms without notice. There should be a workable balance between the consumers’ essential right to know the terms on which his or her debt is incurred and the banks’ concern that a now riskier borrower could continue to run up new debt against the account.

Congress also might consider a credit card safety rating system to help Americans choose between different credit card options. In the Senate, Sen. Ron Wyden (D-OR) has proposed such as system in   S. 2411, the Credit Card Safety Star Act. Similar to the five-star crash test rating system for new cars, a credit card rating system would give Americans information about their credit cards so they can make better decisions. Credit cards would be awarded stars based on a points system, with cards earning points for consumer-friendly terms and losing them for terms designed to get cardholders into trouble. This system would not preclude additional regulation or legislation to prohibit credit card features that may be considered abusive or unfair, but it would empower consumers to make smart choices on their own at a time when there are major dangers ahead.

Tim Westrich is a Research Associate at the Center for American Progress.

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