Disclosure alone is not enough when it comes to today’s complex credit card agreements. Federal Reserve Board Governor Randall Kroszner said as much and more during an eye-opening, frank speech today in Cleveland while addressing the Cleveland Community Development Policy Summit.
The speech, “Protecting Consumers in the Credit Marketplace,” acknowledges that credit card practices and terms have emerged that baffle and mislead consumers: “Even in the presence of good information, practices can emerge that offer little benefit to consumers and, in some cases, may cause harm. In such cases, improved disclosure alone may be insufficient to address these issues,” Kroszner said.
His remarks come as the Fed, the nation’s top banking regulator, tries to address shortcomings in rules governing credit card issuers. In May the Fed and two other banking regulation agencies announced proposals to curb unfair and deceptive trade practices in the credit card industry. The banking industry immediately criticized the Fed’s “intrusion” into market pricing and vowed to fight the measures.
Credit fuels the economy
Kroszner gives credit cards their due. He points out the important role that credit and availability of credit plays in the U.S. economy. Were it not for those plastic cards, loans and revolving accounts, many of the household goods (washers, dryers, etc.) that we rely on might be out of reach for many Americans. Purchasing cars and trucks to get to and from work would be nearly impossible if we had to pay cash.
The challenge in both issuing and using credit and credit cards, Kroszner said, is allowing consumers to make informed decisions about the credit options that best suit their family’s needs.
“In designing rules, we need to take consumers’ actual behavior and understanding into consideration,” he said. “Numerous pages of fine print may provide the comprehensive descriptions that lawyers may prefer, but they can also be confusing, or provide limited value, to consumers.”
Testing and focus groups
With that in mind, the Fed has been conducting focus group interviews with “real people,” using them as testers to see how well they understand credit card terms when presented in different formats.
“Product terms or features can sometimes emerge that offer little or no benefit to the vast majority of consumers,” Kroszner said. “Double-cycle billing, for example, is a practice in the credit card industry that is so complex that few consumers can fully understand the implications of this practice, even in the presence of full disclosure.”
Double-cycle billing is one of the practices that would be banned if the Fed’s proposed rule changes are finalized and approved. The practice involves assessing interest charges for both the current as well as the previous billing cycle’s balances. It affects people who pay off their balance in month but have no charges in the next. Focus group tests showed few people understand how it works. Perhaps that’s why the Fed is recommending giving it the ax.
Kroszner added: “The goal of consumer protection may be most effectively realized, weighing the potential costs and benefits, if certain product features are modified by rule or prohibited outright rather than disclosed.”
The Fed expects to complete and finalized the proposed credit card rule changes by year’s end.
See related: “Fed already getting an earful on proposed credit card rules,” “Fed moves to close ‘timing’ loophole in credit card rules,” “Fed backs rules to curb deceptive credit card practices,” “Regulation Z: Feds move to change credit card rules,”