How to solve the credit card regulation mess

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BusinessWeek recently asked two experts -- a college professor and a senior fellow at the Competitive Enterprise Institute -- about whether laws should be passed to protect consumers from sudden increases in the interest rates on their credit cards. The pro/con piece is a good introduction to this topic, and definitely worth a read.

Karen Gross of Southern Vermont College describes the current policy of disclosure as a "flawed paradigm," writing that that "We erroneously assume consumers read, understand, and act on the explanation of credit card terms they receive. Many consumers, even those who read what they receive, do not fully understand the disclosures, which are often in small print or legalese."Eli Lehrer counters that increased regulation that goes beyond disclosure laws will result in higher interest rates for everyone.

I think they're both basically right. The problem is that the current disclosure laws are grossly inadequate: too many consumers don't read them and oftentimes they're almost impossible to understand -- even if you are financially literate!

Here's my idea for how to fix this mess: a quiz! Before they receive their line of credit, consumers should have to answer 10 multiple choice questions about the specific terms of the credit card. This way, consumers would have to understand the terms. Under the current system, they sign a line saying they understand the terms but don't have to do anything to demonstrate that they really do. That's the equivalent of handing an elementary school student a page with hundreds of math problems on it and saying "Sign there if you understand it", and then giving them an A based on that. Except instead of giving out grades, they're giving out credit. Applicants should have to demonstrate that they understand what they're signing.

And yes: I know that will never happen. But I still think it's the most logical solution to the credit card mess.
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