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Balancing act: Credit card agreements defy understanding

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The rules and regulations that govern the credit card industry have changed quite a bit in the last few years, and more alterations are coming.

Luckily for consumers, all of those changes are clearly explained in easy-to-understand credit applications and disclosure forms.

Or not.

Most consumers take one look at the tiny print and big words in such forms and decide it's not worth the effort to read them. Instead, they cross their fingers and hope for the best.

That's not a great policy, but it's understandable, considering two recent studies that hit my inbox.

First, CardHub.com evaluated how "up-front" credit card applications are without reading the fine print. The website looked at the online applications of the top 10 card issuers and evaluated how easy it was to find information on them.

The results of the study, available online at education.cardhub.com/credit-card-applications-study-summer-2010/, found ambiguity for non-cash-back rewards credit cards in terms of defining how much points and miles are worth.

"Many card applications also performed poorly in terms of clearly disclosing the balance transfer fee," CardHub.com’s news release said. "The study found that ambiguous language and phrases such as 'up to' and 'as low as' still exist in credit card applications, although this has diminished considerably. Most applications were very clear about the annual fee and how to earn rewards."

A CreditCards.com study echoed those results. That company said in a news release that it hired a team of researchers to use computer software to analyze every word of more than 1,200 U.S. credit card agreements. Those agreements were then graded based on the FOG Index, with FOG meaning "Frequency of Gobbledygook."

The results of the study, available online at www.creditcards.com/credit-card-news/credit-card-agreement-readability-1282.php, are not surprising, but they are disheartening. CreditCards.com found that the average U.S. credit card agreement is written at a 12.37 grade level — and only one in five Americans reads at the 12th grade level or above.

Furthermore, the toughest read required an 18.5 reading level, and the longest agreement ran 20,799 words.

"An average person reads 250 words a minute, so this document would take more than 80 minutes to slog through," CreditCards.com said in its statement. "For comparison, the original U.S. Constitution contains only 4,018 words. William Shakespeare's play, 'The Comedy of Errors,' has 17,858 words."

Some agreements were much easier to understand, requiring about a sixth-grade reading level. However, the release said, "the analysis found it's easier for the average American to read a California real estate purchase agreement, or the Genesis chapter in the King James Bible, than to plow through the average credit card agreement."

That's a shame. Pundits decry the poor financial management exhibited by Americans, and it's true that many of us use credit more than we should. But some of the blame for consumers' struggles also rests with card issuers who make it almost impossible to understand their agreements.

"With the credit card industry undergoing rapid change, it's more important than ever that consumers be able to read and comprehend their credit card agreements," said Ben Woolsey, director of marketing and consumer research for CreditCards.com. "If you put the most readable contracts next to the least readable, the difference is night and day. The same information is being conveyed, but in one contract it's clear, the other, it's indecipherable.

"This study sheds light on a new area, and we hope that it leads to some changes — and some rewrites into plain English."

Let's hope so.

Until that day, I'll look to some easily understood Shakespeare for financial advice: "Neither a borrower, nor a lender be."

Send personal finance comments or questions to gkratz@desnews.com or to the Deseret News, P.O. Box 1257, Salt Lake City, UT 84110.