Are Disclosures Enough?
Last week, Federal Reserve Governor Frederic S. Mishkin testified before the House Financial Services Committee about the Fed’s proposed revisions to the Truth in Lending Act (TILA) regulations. These revisions seek to improve the effectiveness of credit card disclosures, particularly because, as Governor Mishkin noted, “the presence in the market of terms seemingly unfavorable to consumers appears to some to indicate that the market is not fully competitive.”
I have always found the discussion about the link between disclosures and choice to be a peculiar one. The theory that consumers, if adequately informed, will choose the product that provides the best protection and services for them has allowed various industries to argue that the ongoing presence of certain terms in consumer contracts (such as mandatory arbitration) suggest that consumers do not actually find such terms offensive or problematic. Consumer groups often respond by arguing that consumers don’t have enough information, thereby questioning the assumption that consumers are adequately informed. As Governor Mishkin points out, however, their ongoing presence might suggest something entirely different - that the “market” itself might need some work.
It is no surprise that the Fed, after extensive consumer testing to determine what terms are most relevant to everyday consumers in their monthly credit card statements, still feels the need to note: “Clearly and simply explaining what these terms mean and how collectively they determine the cost of credit is difficult.” Indeed! It is a bizarre world in which we expect credit card disclosures - sent after the consumer has already signed the credit card contract - to be the source of financial literacy about the costs of credit. Before we can talk about having a successful “market” for consumer financial products, we need to recognize that we currently lack the building blocks on which it might stand.
Informational disclosures alone cannot be the solution. In addition to more substantively using the “R word,” we must commit to improving the nation’s financial literacy, i.e. the ability of consumers to understand in a constructive way the information given to them.
As this is my first post as a new contributor, I look forward to hearing what Warren Reports readers have to offer!
Welcome Ellen!
Everytime I hear "financial experts" on TV/radio etc give "advice" the subject of credit cards comes up.
Except for Dave Ramsey, it is always the same old line on "how to play the credit card game".
The truth is ,some people should never play the game to begin with.
Instead of saying everyone should have at least one credit card, I wish they would say everyone should have savings and emergency funds before they even consider having a credit card! They should also have a steady job!
It's just common sense which doesn't seem to be very common in this credit card nation.
All these credit card offers should be banned too.
I have had credit problems in the past and I am constantly shredding offers telling me I can "rebuild my credit" or "I deserve credit." It's all garbage to me, but some people believe all this and find themself in the CC trap again.
Paying ones essentials should be enough to get someone a decent credt score. This constant message that we all need a credit card is like saying everyone needs to drink alcohol in order to be social. Just as there are some who should never touch alcohol, there are some who should never touch credit cards.
Bonnie
http://pupart.1hwy.com/
June 11, 2007 5:16 AM | Reply | Permalink
Ellen,
The American spending public truly needs to learn and totally comprehend something towards financial literacy. Regulation will go but so far. The average consumer does not understand some of the simple do’s and don’ts with credit cards and consumer spending. BabyBelle nails it exactly by using the analogy with alcohol consumption and spending. You do not need to use a credit card to buy a cup of your favorite coffee. You don’t need a credit card to buy your lunch, and lastly you don’t need a credit card to by a beer, or several. This type of spending is leading people into more trouble. This thinking that a credit card is essential for basic purchases is crazy. Regulations, improved disclosures, or making the fine print larger isn’t going to stop the average credit card consumer from making the wrong choices when they make daily purchases.
“Paying ones essentials should be enough to get someone a decent credit score. This constant message that we all need a credit card is like saying everyone needs to drink alcohol in order to be social. Just as there are some who should never touch alcohol, there are some who should never touch credit cards.”
This is an important point by BabyBelle. The old cliché don’t spend it if you don’t have it doesn’t get through to the consumer. However, take it a little further and say that to only use your credit card if you can see what you bought the next day! Think about that, if one can do this they will lesson the increase of stupid spending and lesson the increase in debt.
Consumer debt and credit card spending is what is causing the middle class to barely survive in their own disatrous middle class economy. The middle class is 80% in debt and the average family saves negative
-1.7%. This is economic injustice, indeed, nevertheless it seems that the middle class is only fueling their own economic plight. The destructive attitude toward credit cards and the lack of serious regulation, that will keep the middle class from harming themselves, is only leading the middle class from becoming simply a large part of the working poor. Ellen with your experience on the Senate banking committee we look forward to your insight regarding consumer debt, spending, finanical literacy and the ever struggling middle class.
June 11, 2007 6:40 PM | Reply | Permalink