Testing the CFPB’s New Credit Card Agreement

The U.S. Consumer Financial Protection Bureau (CFPB) has been in the news quite a lot lately.  It was created to police financial products marketed to consumers. It has written a credit card agreement that is simplified and written in plain English. It is designed to be understood by a seventh grader, compared to present agreements that are at an eleventh grade level.  The purpose is to make the credit card agreements easier to understand minus the legalese and clarify credit card costs, risks and terms.

New Agreement

The average credit card agreement contains 5,000 words compared to this new agreement which is approximately 1,000 words and two pages long. It is broken down in three sections – costs, changes, and additional information.  There will be an online glossary to explain terms such as billing disputes, privacy, rights, interest rate calculations and the consequences of late payments.

Testing

It will be tested in the first half of 2012 at the Pentagon Federal Credit Union, which one is the largest credit unions with 350,000 members.  The form will be given to new credit card applicants. Some will be given the Pentagon Federal Credit Union’s current form for comparison purposes.

Adoption

The adoption of the agreement by credit card issuers will be voluntary.  The American Bankers Association (ABA), a trade association that represents the banking industry, is somewhat supportive of the standardized agreement. They thought it could be shorter and more protections needed to protect banks against lawsuits.  Some of the major credit card issuers were generally supportive, but were concerned that it would not cover the full range of financial products.

Research

There is research to support that consumers don’t understand the agreements. According to a study by J.D. Power, two-thirds of the credit cardholders don’t understand how their cards work.  Most of the complaints, the Consumer Financial Protection Bureau received, involved difficulty understanding the credit card terms, such as billing, interest rates, payments and fees.

Credit Damage Expert, John Ulzheimer, is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Civil Penalty, Credit Cards, Credit Report, Credit Score, Debt, Government, Money & Identity

This post was written by John Ulzheimer