5-Star Safety Rating System Brings Transparency to Credit Card Agreements
Working to give consumers the tools to make informed choices about complex credit card agreements, U.S. Senators Ron Wyden (D-OR) and Barack Obama (D-IL) today introduced the "Credit Card Safety Star Act of 2007." The legislation creates a five-star safety rating system for credit cards in order to increase the transparency of credit card agreements and encourage issuers to abandon abusive practices by offering consumers fair terms they can understand.
"This legislation will help people understand if they can expect their card issuer to treat them fairly, or kick them when they are down," said Wyden. "With the financial future of so many Americans dependent upon unreadable jargon in credit card documents, arming consumers with usable information is more critical than ever."
"Consumers need some way to know which credit cards are safe and which ones are most likely to get them into financial trouble with fees, penalties, and charges," Senator Obama said. "A Safety Star system is an innovative approach to require credit card companies to increase transparency and hold them accountable for any hidden charges or changes. This bill will give consumers a powerful tool to protect themselves, while giving credit card companies an incentive to improve their practices."
Much like the five-star crash test rating system for new cars, the "Credit Card Safety Star Act of 2007" will give consumers a window into the safety of their credit cards. Under the legislation, every credit card, billing statement, agreement, application, and piece of marketing material will be required to carry the credit card's safety star rating, which will range anywhere from one to five stars, with five stars representing the safest cards.
Cards will be awarded stars based on a points system, with cards earning points for consumer friendly terms and losing them for terms designed to get consumers into trouble. For example, card issuers that can change the terms of an agreement at any time for any reason would receive a one-star safety rating.; while credit cards that give 90 days notice before the issuer intends to change terms, or cards that write their agreements at an accessible reading level would get more stars.
Under the Credit Card Safety Star rating system it is expected that most of the cards available on today's market will rate an average of one or two stars. Similarly, when the five-star crash rating system for new cars first came into existence, no car received more than two stars in any of its crash ratings. Today, however, many cars receive five-star ratings. The Credit Card Safety Star program is designed to have a similar effect on the credit industry by forcing card issuers to compete on the basis of providing a consumer-friendly product. Consumers prefer credit cards with fair terms, so they are more likely to choose cards with higher star ratings. Therefore, card issuers will have to improve their practices in order to attract and keep customers.
The Credit Card Safety Star program would be administered by the Federal Reserve and periodically reevaluated and updated based on market innovations and the program's effectiveness. Because some issuers may refuse to abandon some of their worst practices despite market competition, the program is designed to accommodate the possibility of further legislation or regulations eliminating such practices.
According to data from the Federal Reserve and the U.S. Census Bureau, in September 2007, U.S. consumers were carrying close to $880 billion in credit card debt - nearly $2,900 for every man, woman and child in the country. Credit card debt has increased by almost $163 billion since 2004, an increase of over $500 per person in the U.S., or 23% in just 3 years.
For more information, go to http://www.wyden.senate.gov/issues/Legislation/Credit_Card_Safety_Star.cfm.