Don’t Bank on Bankers’ Credit-Card Disclosures

“Credit-card loans are very profitable for banks,” says Spencer Nilson, whose Santa Monica-based Nilson Report covers the credit-card industry. “They make more money than any other kind of loan; that’s why they’re pushing them.”

Indeed, credit cards, and their finance charges, are a way of life for vast numbers of people. Large banks and retailers report that up to 90% of their card holders carry balances from month to month, with the average amount outstanding between $600 and $900.

Bankers think such high usage proves that most card holders understand and appreciate the terms of this particular product. What’s more, says Barry Wolfgram, vice president of credit extension in Bank of America’s bank card division, “it’s the easiest loan for the consumer to activate; you don’t have to come to your bank to get the loan.”

High usage could also prove that card holders understand the terms poorly, so that confusion plus convenience urge them easily and unknowingly into debt. There’s nothing illegal or dishonest in the process, but it’s certainly inscrutable, even impenetrable, “as if banks are afraid,” says one consumer, “that if they spelled out the terms, more customers would realize how much they’re paying for use of the cards and strive to cut back.”

All too often, bank explanations seem “garbled,” says a San Franciscan, quoting a First Nationwide statement: “The annual percentage rate for this statement was computed by dividing the finance charge by the ‘average daily balance’ of purchases plus the greater of the ‘average daily balance’ of cash advances or current cash advance transactions and multiplying the result by 12.” “They call that ‘disclosure,”’ she says.

Undefined Terms

They rarely define repeated technical terms such as “periodic rate,” “average” and “adjusted” daily balance or “extensions of credit.” Instead of saying, “If this bill is paid in full,” they may say, “If the total of the payments and credits which are posted to your account by the payment due date shown on a monthly bill’s statement is equal to or exceeds the new balance shown on that statement . . .” (Bank of America). They confuse time periods, preferring to talk about “the new balance from your previous statement” instead of “previous balance due.”

Bank officials readily admit it’s hard going. “Of course it’s incomprehensible to the common person,” laughs one bank lawyer, “even to the legal staff of the bank. And the marketing people go crazy because everyone says: ‘I can’t read this crap!’ ”

Bankers also claim such wording is inescapable, “spelled out” in federal Truth in Lending Regulations (known in the industry as “Regulation Z”). Actually, “Reg Z” only spells out what has to be disclosed, suggesting “model” language (much simpler than the stuff above) but just for certain methods of computing finance charges. Even then, “there’s absolutely no requirement that they use the regulation’s language, but there’s a good incentive,” says a staff attorney at the Federal Reserve Board in Washington. “If they describe it the suggested way (assuming they do it that way), there’s some protection from civil liability.” That appeals to bank lawyers, who envision a class-action lawsuit involving a million or more card customers.

Other retailers, though equally bound by Reg Z, seem more innovative, thanks perhaps to a smaller customer base, smaller legal staffs, more marketing expertise and greater consumer orientation. “We felt that as long as we were going to this effort, we had a moral responsibility to tell people in English what was happening,” says Joanna Logsdon, general credit manager for Bullock’s stores in Southern California. (Bullock’s begins its step-by-step explanation with “We start with the previous balance of your account at the beginning of a billing period . . . “). “The whole purpose of explaining is to put the consumer in control of his own account.”

Not Like the Usual Loan

“Part of the problem with making it simple,” says the Federal Reserve spokesman, “is that the programs are so complex.” Consumers may (finally) understand that they have a loan, paying actual interest rather than just late charges, but then they must also understand that it’s not like the usual loan.

These are “revolving” credit loans, which means, says Gregory Bjorndahl, executive vice president of Security Pacific National Bank, that instead of being a fixed and exhaustible sum, “the credit kind of revolves around, so that the amount you pay back is right away available for you to borrow again.”

Generally, an unpaid balance also rolls over, of course, and the minute it does, that credit line becomes a loan--a loan kicked off the first time one doesn’t pay in full. Consumers have an even harder time understanding that “once you start revolving, like purchasing something for $50 and paying $25,” says Cathy Basch, senior vice president at Crocker National Bank in San Francisco, “you’re going to incur interest on the unpaid balance plus anything new you buy that next billing cycle.”

In fact, says one consumer, what’s most confusing is that “nothing is fixed.” The interest rate may change with the amount purchased, the loan term is open-ended, and the amount lent can change daily, and with it the finance charge.

Actually, banks seem to know that understanding only comes with the first revolution, “when they get their first bill,” says B of A’s Wolfgram, and go into their branch for a lengthy, charted explanation. Understanding of these mass market loans is apparently not even widespread among bank personnel: “At least one person in each branch can explain it,” says Barbara Evans, vice president of credit services at Security Pacific.

Once understood, however, credit-card loans do have one crowning advantage over other loans. If, unlike other loans, the consumer doesn’t have to do anything when he wants to borrow money, it’s also true that once granted the credit, he doesn’t have to use it.