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New credit cards terms aim to be shorter, easier to understand

[Friday, February 10th, 2012]

On December 7, the Obama administration unveiled simplified credit card agreement regulations. This legislation, which is part of the new Consumer Financial Protection Bureau, is an effort to help cardholders understand the interest rates and fees that they are charged by credit card companies.

Credit card companies now have a sample cardholder agreement to follow that the government claims is written in clear and concise language. The Consumer Financial Protection Bureau believes that by making these fee agreements easier and shorter, more cardholders will be encouraged to read them and understand their credit card billing.

Credit cards a large part of the American economy. The United States saw $1.9 trillion charged on credit cards in 2010. There are a reported 514 million credit cards issued in the country, which totals to 1.5 for each citizen.

The average cardholder agreement is 5,500 words. However the government’s revised form comes in at just 1,100 words. This two-page agreement is not only shorter but uses large type to call attention to important figures such as the annual percentage interest rate on purchases, cash advances and balance transfers.

Consequences for the banks

This new requirements will require credit card companies to spend millions re-writing and reprinting the current language on credit card agreements. So far, it is unclear on the impact the new credit card company agreements will have on actual spending or new credit card applications. The government is hoping that the card agreements reduce stress and may in fact increase short-term spending on cards but help customers reduce the debt.

Some critiques for simplicity

The American Bankers Association says that the proposed form doesn’t go far enough in simplifying the language on credit card agreements. It has vowed to do a closer investigation into common cardholder questions and concerns before releasing a even shorter and simpler prototype form.

The Consumer Financial Protection Bureau claims it received 5,000 customer complains over a 3-month time frame. It cites poorly worded and confusing terms and conditions agreements as a core cause of the public outcry.

One aspect that makes the standard credit card agreement so complicated is the variety of variables. Most cards attach grace periods on late payments and new interest rates that may rise with the consumer price index on a yearly basis but also be contingent on a costumers behaviors. Not to mention complications that arise if credit card companies are using provisional balance transfer fees or penalty fees that not only change the monthly total but may also affect a customer’s annual interest rate.

Rather than changing the way these companies operate, the government is only changing the way that they present the fees and balance structures. The hope is that short, simple, easy-to-understand credit card agreement, will increase competition and weed out those cards that are unfair by helping consumers clearly see the terms of the deal.

Cardholders can reply with their feedback on the sample forms using this website. The first major test of the proposed form will be down with customers of the Pentagon Federal Credit Union, one of the nation’s largest credit unions.

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