On Credit Card Legislation and Consumer Education

Much has been made over the sweeping changes being forced on the credit card industry by the Obama administration, with the overriding feeling that the changes will make things easier on consumers. While I don't dispute the fact that the new laws will have some positive effects, I contend that the real problem is that consumers simply don't understand how credit cards (or any of kind of consumer debt for that matter) truly work.

The problem isn't really how the credit card companies treat their customers, it's the lack of education on the part of consumers. No bank can take advantage of an educated consumer, and the consumers who "fell victim" under the old laws will continue to face issues under the new ones.

A classic example of this is an article that came out a few years ago where a Harvard Law Professor discussed how none of her students could find the APR on numerous credit card offers, with the implication being that if her Harvard Law students couldn’t find the APR then how could the average person? Here is the rub: credit card offers don't often provide the actual rate, instead they provide you with information on how to calculate the rate. They often give you a "margin amount" that you add to the prime rate to figure out the actual APR, ditto for situations where you miss a payment or commit other infractions that would cause your APR to go up. E.g. if the prime rate is 6.0% and the margin is 8.2%, the APR is 14.2%.

The same article claimed that credit card companies trick their customers by moving around the date that the payment is due, when the real truth is that the payment is usually just due after a fixed interval of a certain number of dates, and the date changes due to the fact that not all months have the same number of days. Either way the customer wouldn't have to worry about the date "moving" if they simply read their credit card statement every month, the real problem is that they assumed the payment was always due on the same date.

In other words while you can legislate changes that will make things easier on the customers, the fact remains that without education you're not truly solving the problem. Credit card agreements are always going to contain quite a few gotchas, and if people don't read and/or understand the agreements they have with the card issuers they're going to run into problems

It's analogous to trying to fix the problem of fatal car accidents with an increased number of safety devices, when the real problem is bad drivers who don't wear their seat belts.

So while the efforts of the Obama administration will help things a bit, they won't solve the core problem.

Comments

[China Expert:]

I agree, the real problem is that 90% of the kids don't know how a credit card works. They are prepared for many subjects which they will not use 90% in their lifetime, yet they know little about the very basics of finance 101. Then when they go to college and get flooded with Credit Cards they can't possibly afford, the kids and their parents are surpized that things get totally out of hand. I bet that 90% of the kids entering college have no idea that if they make their minimum payments on their credit cards that their balance will NEVER be paid off ! It's so sad that parents and schools are basically naive when it comes to preparing children for a facit of life that impacts them every day in their future lives !

May 26 05:00 PM

[taperx:]

Funny thing is when Visa went public, 90% of wall street didn't even understand their business model!! It's now been said a million times over that V/MC dont have a consumer credit risk. Most of the general public still don't understand this entire business model!! How can they possibly understand the fine print.

May 27 01:12 AM

[HokieMac:]

maybe they dont have a credit risk, but they sure have a volume risk if V/MC change the rules on their non-borrowing users, or impose a monthly fee, etc, on the charge-and-pay each month crowd....

May 27 04:02 PM

[guiron:]

"if people don't read and/or understand the agreements they have with the card issuers they're going to run into problems"

Credit cards used to be much more difficult to get, requiring a good credit history, and rates were capped.in many states. Since around 1980, regulation has been loosened, and a lot of people who never should be given credit cards are allowed to amass huge balances with 20%+ interest, which is usury, truly. And it's insidious, because the business model is basically to totally screw people who have a shaky history of managing their money, like the check cashing places who do payday loans at worse rates than you can get through a loan shark.

I'm not sure why anyone thinks it's a good idea to let the financial industry basically rob people blind who don't know any better. It's not going to benefit people in the long run, if you have a giant machine sucking up far too much money from millions of people who can't afford it for no proportional benefit to their lives, and possibly ruination, after the bank nails their "customer" over and over with insane fees and interest rates which make their loans multiply exponentially, leaving many of them insolvent or essentially bankrupt. Of course, people should be responsible, but not everyone can see that sort of freight train coming, and it's amazing that there is no ethical boundary for these companies which says to stop bleeding a corpse (otherwise known as their customers), so there must be a legal one so that people's lives aren't destroyed over lack of financial savvy. When people use credit cards they don't often think about compounding and how it affects their balances, and using credit cards shouldn't carry the same risk of loss as junk bonds and penny stocks, and especially not on people who haven't demonstrated a history of using credit well. Education will not make the difference, because even educated people can be bad with managing money, or just suckers. If you allow business to screw people over, they will easily find enough takers, and it won't make them more responsible or improve the situation for anyone.

May 29 09:52 PM