This article appears in the December 2009 issue of Cards&Payments.
Many consumers perceive credit and debit card issuers as experts at burying crucial information about interest-rate increases and fees in the fine print that accompanies most card disclosures and monthly statements. But card networks and issuers hope to reverse that perception in the coming months as consumer financial literacy and education becomes more serious business.
After years of seemingly perfunctory efforts to educate consumers about the true cost of credit card debt and shrouding account information in dense legal language, card issuers now are rushing to improve their consumer-education materials and to illuminate certain pitfalls associated with using credit cards and revolving card balances.
The movement to beef up credit card consumer education coincides with new legislation going into effect early next year that requires issuers to more clearly spell out the cost of cardholders' credit card debt with each monthly bill. Beginning in February, issuers for the first time must provide a chart on the first page of each monthly statement revealing how long it would take a borrower to pay off the balance making only minimum payments. Issuers also must note on each statement the monthly payment required to pay off the balance owed within 36 months.
But many payments organizations are going well beyond those requirements. Visa Inc., MasterCard Worldwide, American Express Co., Discover Financial Services, Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc. are among the companies that in recent months have developed new financial-literacy tools and materials to enable cardholders to better analyze credit card spending and debt management. The newest offerings primarily are interactive and Web-based, and cardholders can download many of them to their personal computers or mobile handsets.
And as financial literacy takes on more importance, issuers are getting more competitive with their offerings. Online informational videos and interactive quizzes are accompanied by videogames and sophisticated spending-analysis tools that enable users to plan how they will liquidate debt and manage their present and future spending (see chart).
Observers say one reason these changes are occurring is because, as issuers wallow this year in record-high financial losses and spiraling negative consumer perceptions, many realize educating consumers about responsible card use has become an economic necessity. By teaching consumers how to avoid being caught in debt traps, issuers hope to stem further losses and enhance customer loyalty.
"This has been an unusual year in terms of card losses, and it is causing more card issuers to realize that financial literacy is more than just a feel-good thing," says Jason Alderman, Visa senior director of financial education.
Since 1997, Visa has offered a diverse range of financial-literacy materials to issuers and to the general public through schools, local events, its Financial Football and Financial Soccer educational videogames, and other programs offered through its Practical Money Skills for Life program. But this year Visa has noted a definite increase in issuer demand for its financial-literacy materials. "Issuers are starting to see a real bottom-line connection to meaningful financial-literacy efforts," Alderman says.
Issuers ought to respond to consumers' need for better credit card education by putting the same amount of energy into financial-literacy efforts as they do into general marketing campaigns, recommends Susan Keating, president and CEO of the National Foundation for Credit Counseling, a U.S.-based nonprofit. "Card issuers should integrate credit card financial education into the core of the credit card industry by making a connection between financial literacy and credit availability," she says.
Some observers, however, remain skeptical about just how far card issuers are willing to go to protect borrowers in an industry where interest rates and fees contribute significantly to profitability.
"With their endless fees and sharp interest-rate hikes, the credit industry in recent years has developed a reputation for using marketing methods that felt to a lot of consumers like bait-and-switch tactics," says Ginna Green, a spokesperson for the U.S.-based Center for Responsible Lending. "Typically card issuers have pushed the details about finance charges and interest-rate increases into fine print in language nobody really understands, so most people have no idea what they are getting into. Issuers may say they want to improve financial literacy and help people avoid falling into traps, but we have a long way to go before card issuers are providing more clear print than fine print."
Bad Blood
The bad blood between consumers and card issuers took a turn for the worse last year. Issuers for years have disclosed their interest-rate and fee policies in card agreements and disclosures, with the often-repeated theme that they could change terms at any time and for any reason. But many customers never bothered to decipher the fine print and did not understand how those policies might affect them in a serious economic downturn.
The crash in real-estate values and widespread job losses caused many consumers to borrow more heavily on their credit cards and miss payments, which in turn prompted issuers to offset higher borrower risks by sharply increasing interest rates on strapped consumers' outstanding balances. The skyrocketing interest rates, combined with a blizzard of seemingly unfair late and other penalty fees, stung consumers when they could least afford it.
The resulting consumer outrage helped lead to passage last May of the Credit Card Accountability, Responsibility and Disclosure Act, which will go into effect on Feb. 22. The law bans most penalty-based interest-rate increases on outstanding balances and requires issuers to apply monthly payments first to borrowers' highest interest rates. Cardholders already are getting an extra week to pay their monthly card bills and 45 days' warning plus the opportunity to decline any interest-rate increase, in accordance with certain provisions going into effect this year.
Gripe Relief
The new rules may help relieve some of credit card industry practices that caused the most griping from consumers. But research suggests that issuers indeed have a serious image problem with consumers, and improving financial-literacy efforts could help rebuild lost ground.
In an online survey of 2,000 U.S. adults last May, U.S.-based market-research firm GfK Financial Services found that 77% of respondents said they "do not like to be in debt at any time." Doug Cottings, GfK managing director, says the survey's results suggest card issuers should take remedial action in their customer communications.
"Card issuers should take a proactive approach to communicating with their customers, providing useful advice and explanations for all of their actions," he says. "In the absence of such information, our research shows that consumers are going to assume the worst," which could lead to loss of issuer market share.
Research suggests plenty of room for improvement exists in card issuers' traditional consumer-education offerings.
Corporate Insight Inc., a U.S.-based marketing and consulting firm, says the U.S. credit card industry's online consumer financial-education tools lack the depth and quality of those stock-brokerage, mutual-fund and investment firms provide. The firm reached its conclusions after reviewing the online financial-education materials and tools that 11 major U.S. credit card issuers offered last July.
Several firms' online offerings were "more promotional than educational," says James McGovern, Corporate Insight vice president of consulting services. Though card issuers typically offered rudimentary educational materials about using credit responsibly and some provided online calculators to estimate the cost of carrying debt, "most fail to integrated online calculators and quizzes into other educational materials, so there is no sense of a lesson learned and no feeling of which product would be most appropriate for a certain customer," he says.
Chase and Citigroup stood out among their card-issuing peers for offering the richest mix of financial-education materials targeted to specific customer groups, McGovern says. But those kudos aside, the card industry has a lot of catching up to do, he says.