Sen. Ron Wyden, along with cosponsor Barack Obama, wants to create an easy way for consumers to understand credit card policies by rating them according to a five-star system. The concept is similar to the five-star crash test rating system used for cars, with more stars given for more consumer-friendly policies and the Federal Reserve serving as referee. The proposal has come under fire from the credit card industry on the grounds that consumers are a diverse group and one person’s five-star card might be a one-star to someone else. U.S. News spoke with Wyden, an Oregon Democrat, about why he believes credit card reform is needed. Excerpts:
Why do we need a five-star credit card rating system?
I think a lot of these credit card agreements are almost incomprehensible. They’re written in so much legalese that anybody who doesn’t spend their day reading the Uniform Commercial Code pretty much can’t understand them. So what I want to do is make sure, as it relates to safety and debt and fairness, that the consumer gets a better shake. This is a third-path kind of approach in between what the credit card companies want to do, which is pretty much nothing, and what some say ought to be done in terms of regulating everything under the sun.
Why do we need a five-star credit card rating system?
I think a lot of these credit card agreements are almost incomprehensible. They’re written in so much legalese that anybody who doesn’t spend their day reading the Uniform Commercial Code pretty much can’t understand them. So what I want to do is make sure, as it relates to safety and debt and fairness, that the consumer gets a better shake. This is a third-path kind of approach in between what the credit card companies want to do, which is pretty much nothing, and what some say ought to be done in terms of regulating everything under the sun.
What criteria would you like to see used in judging safety?
Today, there’s a lot of advertising around some of the big issues—interest rates, annual fees, rewards, and things like that, which are areas that really are for the markets. Those are where people make their own judgments about what it is they really care the most about.
But what I want [is for] people to see an objective evaluation of whether this is a card that treats the consumer fairly and adheres to the sensible safety principles. And that involves not the question of comparing fees and interest rates and rewards, but on things like, do they hide all of the material terms in a bunch of legal jibber-jabber? Do they give people adequate notice if they make changes? Issues that go to safety and fairness, and not picking winners and losers. And I hope that we can bring that distinction out between the two, because I think if we do, we’re going to have a very powerful coalition for the legislation.
It seems that you’re saying people don’t have the information they need to make decisions.
By and large, a lot of these companies have gone to great lengths to hide a lot of what is in their agreements. And that isn’t fair. I don’t think it’s safe, given the amount of credit card debt individuals in our country have racked up.
The credit card industry has argued that even some of the criteria you mention, such as universal default, affect only a portion of consumers, so it would be impossible to develop a rating system that applies to everyone.
You’re going to have to have a debate about what the practices are that go to basic fairness and basic safety. The Congress will do that, and, if the legislation passes, the Federal Reserve really has the job, as professionals in the field, of making sure that that’s done. I happen to think universal default goes to a fundamental safety sort of question. Other people may see it differently. That’s the point of the debate.
Why do you think universal default (where credit card companies raise interest rates on cards after consumers default on other loans) is unfair?
I think to stick it to a consumer for something that’s unrelated to your relationship with [the] company isn’t in line with sort of basic commercial principles…. I think it speaks to an arbitrariness and also raises in my mind, well, where do you stop? If you’re going to now say, our agreement really doesn’t matter, we’re going to penalize you for something else, why don’t they just penalize you for all kinds of other things? I think it really violates a basic sense of fairness which is built around the idea you and I have a relationship, and we’ve got to adhere to it.
The industry just says it’s simply pricing based on risk levels. If a consumer defaults on his auto loan, then he has a better chance of defaulting on his credit loan, and the card provider needs to be paid for that risk.
My obligation is to the company I’ve signed an agreement with, and the question is: Do I meet my obligations to the person I entered into an agreement with?
Do you think it’s fundamentally fair to charge more to people who exhibit riskier behavior?
I think by and large, pricing debt is built around the proposition that you’re going to disclose all of the terms and do it in an understandable way, which isn’t what goes on today. The Government Accountability Office says [on average] credit card agreements are written at a reading level that 50 percent of Americans don’t understand. So to me, if you’re communicating what your terms are and your terms will factor in risk and the like, it is appropriate, but you’ve got to be straight with people and transparent, and that’s not being done today.
But you don’t support interest rate caps?
I’ve always felt that caps and price controls and the like end up usually harming the consumer, because there are all kinds of ways that powerful businesses and business lobbies can get around them, but the consumer gets caught. Obviously, there are some things that are so egregious and so offensive that I would vote to restrict, but I’m not a big caps fan.
Have you ever have had credit card debt?
I haven’t had any serious kinds of issues. I think once or twice as an adult, I had to pay a little back but nothing serious, certainly nothing in the last decade.
