The Credit Union Times picked up an interesting read on credit card agreements from a section in the CFPB’s recently published review of the U.S. credit card industry.
“A CFPB report found the top 20 issuers of credit cards write agreements that are significantly longer than other banks and credit unions, but their prose is simpler.
The CFPB uses the same rule of thumb used by crotchety city editors to berate genius new reporters fresh out of college: Write for a reader with an eighth-grade education.
The CFPB found credit unions stood out in the brevity of their agreements, but less than half of members with only a high school diploma would be able to read them.”
You are probably saying that no one reads their credit card agreements, but they probably should. On the one hand, you cannot do much other than not signing the application if you do not like the terms. On the other hand, my recommendation is that you at least skim the document. My most recent credit card application was through Goldman Sachs for the Apple Card. There are 19 pages filled with the finer art of arbitration agreements, account sharing, pricing, and determining interest rates. I read every word if only to have a user-side understanding of the finer art of Apple’s Daily Cash Program.
Most important, though, is the readability level. Says the CU Times:
“Simplicity of the text was measured by median Flesch-Kincaid grade levels for each issuer class. This metric was designed to chart complexity and calculates expected reading level by considering the average number of words per sentence and syllables per word in a document.
Among the Top 20 issuers, the median Flesch-Kincaid grade level was about 10.2 last year, meaning that less than half of those with a 10th-grade education would be able to read the agreements. Scores for other banks and credit unions were both about 12.2, meaning less than half of high school graduates can read the agreements.
“However, agreements in the top quartile for smaller banks and credit unions now equal or exceed the expected reading level of cardholders who have completed two years of post-secondary education,” the study said.”
CFPB covers the issue of arbitration clauses, which are almost universally required by top issuing banks, and only required by 15% of credit unions. This makes sense when you consider the potential cost of a class action. A 2020 credit card class action settled at $5.54 billion, on the merchant side.
However, the go-to summary on a credit card agreement continues to be the “Schumer” box, which provides a standardized recap of financials covered in the contract. The big question remains: Do people read their agreements in the first place, and would they get their reward points if they chose not to sign the arbitration clause?
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group