Here’s an interesting question. What proportion of the millions of credit card agreements taken on each year by consumers have been properly read and fully understood before they were signed? There are no prizes for guessing because its highly unlikely that anyone knows, but your blogger suspects that the percentage is tiny. Actually, he suspects that you could count the number on the fingers of one hand, but he’s a cynic.

Credit card contracts impenetrable

Of course, everyone knows that you shouldn’t sign anything that you haven’t read, but that piece of wisdom tends to go out the window when people make credit card applications. Most just cross their fingers that the agreement doesn’t contain outrageous terms, and anyway know that the chances of their successfully negotiating any variation in the standard-form contract are negligible. So nearly all of us simply sign and hope for the best.

Now all that could be about to change. On Dec. 7, the Consumer Financial Protection Bureau (CFPB), a federal regulator, unveiled a draft credit card agreement that it hopes will become a template for future contracts. By comparison with existing documents it’s unrecognizable:

1. It’s short: just 1,100 words across two pages, rather than the 5,000 or so that current contracts average.
2. It’s easy to read: no long words or incomprehensible legal jargon — just plain English.
3. It’s simple to navigate: you can find everything you need to know easily, thanks to its easy-on-the-eye layout.

More than just credit card rates

The top half of the first page concerns different credit card rates and other costs that apply in different circumstances: balance transfers, cash advances, foreign transaction fees, introductory APRs and so on. The lower half has four headings:

1. What do I have to pay and when?
2. What if I pay late?
3. Special promotions
4. How is interest calculated?

Turn over, and there are details of the circumstances in which credit card rates and other charges can change, followed by “Additional Information,” which includes:

1. The company’s rights
2. The consumers’ rights
3. How disputes should be resolved
4. Other terms and conditions
5. Privacy

Credit card companies cautiously welcoming

Credit card companies aren’t always welcoming of government interference in their businesses, but their initial reaction to this suggestion hasn’t been wholly adverse. True, some are concerned that a lack of legalese in their contracts could open them up to expensive litigation. But this was how Kenneth Clayton, chief counsel at the American Bankers Association, greeted the CFPB’s proposal in a statement:

For more than 20 years, the banking industry has strongly supported efforts to provide consumers with a short, easy-to-understand summary of their credit card agreement. The model released by the Bureau is a good first step, but could be made even shorter, as well as less susceptible to costly lawsuits and the higher consumer prices that come from them. We look forward to working with the Bureau to ensure disclosures provide exactly what our customers need and want to know, while maintaining consumer access to competition and choice in the marketplace.

Maybe some day soon virtually all of us are going to understand the card contracts we sign.

Published 12/14/11 (Modified 04/20/12)