On Credit Card Legislation and Consumer Education

 |  Includes: AXP, COF, DFS, MA, V
by: Markham Lee

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.