4/5 Free Articles leftRemaining

The Digital Opportunity Staring Credit Cards in the Face

June 11, 2014
The Digital Opportunity Staring Credit Cards in the Face

Credit card companies could be doing a much better job of saving us from ourselves.

It’s well known that very few consumers are familiar with the terms of their credit card agreements and that even fewer are aware of those terms’ implications. Pop quiz: What are your favorite card’s interest rate and fees? If you were to charge $1,000 to it and make only the minimum payment each month, how long would it take you to pay it off?

We couldn’t answer those questions either. This lack of awareness can get people into deep trouble. Without realizing what they’re doing, consumers can quickly amass huge, expensive debts, and the consequences can be far-reaching. Recent history has demonstrated the dangers posed to the economy as a whole by poorly understood financial products.

That’s why Congress has been requiring credit card companies to be more transparent. For example, the 2009 CARD Act stipulated that each monthly statement include a “minimum payment warning” spelling out how much time and money it would take to pay off a card by sending in just the minimum. Here’s an example of such a disclosure, which shows the high long-term cost of accumulating credit card debt (in red):

Credit Card Statement Image

But this disclosure policy and others like it are designed for a world that’s rapidly disappearing: that of paper statements and postal mailings. Although consumers are going paperless in droves, a customer paying a credit bill online via a PC or a mobile app can almost always do so without ever being shown the minimum payment warning. Here’s what a typical online payment page looks like on a computer screen:

Credit Card Statement Image 2

To see the minimum payment warning, a customer would have to find and download an electronic version of the paper statement.

Although the federal legislation doesn’t require it (the law focuses on monthly statements, which are central to the paper-statement world), credit card providers should post the warning where it can be easily seen. If a disclosure is important enough to be on the first page of a paper statement, it should be on the corresponding online payment page and mobile-app screen. But there’s a bigger point: The credit card companies are missing a valuable opportunity to make consumers smarter about debt.

Unlike a paper statement, a web site can turn a data point into a function that aids decision making by spitting out dynamic, personalized information. People are already—and increasingly—using such online tools to help translate personal data into good decisions. FitBit, for instance, takes complicated health goals such as weight loss and distills them into something as simple as tracking the number of steps you take each day. The tool works because it makes a difficult task much easier to manage. Other tools tell us which foods are healthiest, which driving route is fastest, and which new TV series will hook us.

Apply that concept to financial decision making, and you can see how effective it might be for credit card companies to turn the minimum payment disclosure into an online tool. Consumers could use it to see the ramifications of paying the minimum or any other amount that fits their financial circumstances, like so:

Credit Card Statement Image 3

A few credit card companies are beginning to take their online offerings in this direction. Capital One recently launched the Credit Tracker, which allows customers to simulate how financial decisions might affect their credit scores. This is a laudable development, but such tools are incomplete, and hardly an industry norm.

Which brings us to the question of whether the credit card companies want consumers to be smarter about debt. Some would argue that they don’t, that their business model is built on extracting hefty interest payments from us, even if it means driving us and the economy to ruin. Certainly the companies’ decision to follow the letter, but not the spirit, of the CARD Act by leaving the minimum payment warning off of online bill-payment screens suggests a cynical disregard for consumers’ financial welfare.

But improved financial literacy should be in the companies’ interest. In a world where card companies are often perceived as the bad guys, this is a way for a company to differentiate itself as a consumer advocate and build a more engaged, loyal customer base. Sure, such efforts would come at a cost. But the potential upside is large: making consumers smarter about their use of credit and reducing default risk, in addition to building a stronger brand. Credit card companies have an opportunity to present themselves not only as providers of credit but as educators.

And in that role, they need to see the internet’s vast potential as a tool for education as well as for easing the management of difficult things. In fact, there are other tools that card companies could build as well. For example, they often provide customers with end-of-year spending analyses—displaying how much of your expenses went toward gas, entertainment, groceries, and so forth. An online tool could allow customers to set spending goals and benchmark their spending against a set of peers of their choosing, encouraging smart financial decisions.

The internet has opened up consumers’ and corporate leaders’ thinking about the meaning of disclosure. Credit card companies should take a lesson from what other consumer companies have done and truly enter the digital age as leaders in improving financial decision making.

Michael Luca is an assistant professor at Harvard Business School.

Chelsea Burkett is a 2014 MBA graduate of Harvard Business School; she will be joining Google.