Five-Star Rating for Credit Cards

Sen. Ron Wyden proposes a new credit card reform. It involves classifying credit cards according to a five-star rating system. The plastics will be awarded stars for consumer-friendly terms and lose them for unfavorable terms. The new rating will help consumers make smart choices.

However, the proposal has come under fire from credit card companies. They say that it is impossible to develop a set of criteria that would suit to all consumers.

New credit card legislation is necessary nowadays. Americans who want to use their credit cards responsibly - and choose the most suitable credit card offers - have a difficult time reading the obscure terms of their credit card agreements. The Government Accountability Office says that about 50% of Americans don't understand them. Moreover, some credit companies tend to reveal information only about interest rates, annual fees and reward programs. These features attract most attention and become the decisive factor what credit card to choose. Many customers don't know why their APR goes up or what the universal default means. The new rating system will increase the transparency of credit card agreements and encourage issuers to offer consumers fair terms that they can understand.

The new credit card rating will work similar to the five-star crash test rating system for new cars. Credit cards will earn points for favorable terms and lose them for terms designed to get consumers into trouble. For example, credit companies that can change the terms of an agreement at any time for any reason would receive a one-star safety rating. The plastics that offer 90 days notice before the issuer intends to change the terms would be awarded more stars. The Federal Reserve will serve as a referee.

The new legislation wouldn't set any interest rate caps or price controls. Ron Wyden thinks that they end up harming the consumer, because there are many ways for powerful businesses to get around them.

According to the five-star rating system, most of the plastics available on today's credit card market are expected to rate an average of one or two stars. Similarly, when the five-star crash rating system for new cars was introduced, all cars received just one or two stars. Today, however, many cars are awarded five stars because their quality has improved.

The Credit Card Safety Star program is designed to have a similar effect on the credit card industry. The Congress hopes to force credit companies to compete on the basis of providing a consumer-friendly product. It goes without saying that consumers prefer to apply for top credit cards, so they will choose plastics with higher star ratings. That's why credit companies will need to improve their credit card agreements in order to attract and keep customers.