Can't Understand Your Credit Card Agreement? You're Not Alone

Filled with page after page of legalese and tiny print, the average credit card agreement is written in a way that most Americans simply can't understand.

Nearly half of Americans "never" or "hardly ever" attempt read the contract that comes with their shiny, new plastic, according to a survey from CreditCards.com. That's hardly surprising. When was the last time you read a credit card contract? But it is profoundly troubling that most Americans couldn't understand what the agreement said even if they tried.

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CreditCards.com used readability software to examine more than 2,000 credit card agreements on file with the Consumer Financial Protection Bureau. The software looked at factors, such as average word length and average sentence length, and determined that these agreements were written, on average, on an 11th-grade reading level. That's beyond the average American's capabilities.

Wait. How is 11th grade below the average reading level? Didn't most everyone graduate from high school?

Yes, more than 80 percent of Americans graduated from high school. However, reading experts say that most adults' reading level is two or three grades below the highest grade they reached in school. Thus, a high school graduate might only actually read at the 9th-grade or 10th-grade level, below what is needed to understand a credit card agreement.

Just how bad are these contracts? Anyone who has even looked at a credit card agreement knows how daunting they can be. They're often many pages long. (One from Key Bank was 22 pages long, totaling more than 15,000 words.) The print often looks microscopic. They're about as appealing as a trip to the dentist.

The biggest problem, however, isn't how many words there are or how small those words might be. The biggest problem is that the words are written in such an unnecessarily complex, confusing and convoluted way that they make very little sense to anyone who doesn't have a law degree.

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Here's a perfect example from Navy Federal Credit Union:

"a. Security Interest Specific for Credit Cards. I/We acknowledge and pledge, specifically as a condition of my/our use of the credit card, that I/we have voluntarily granted NFCU a security interest in all of my/our individual and joint share accounts at NFCU. If my/our credit card loan becomes delinquent, this security interest may be used without further notice to pay all or part of such delinquency. This security interest does not apply to shares in an Individual Retirement Account (IRA)"

Confusing, right? It didn't need to be.

This passage is basically saying that if you're late paying your Navy Federal credit card bill and you have other Navy Federal accounts -- a checking account, for example -- Navy Federal can take funds from those other accounts to pay that bill. It's a pretty straightforward concept that is obscured by jargon and confusing terminology. This happens all the time with these types of agreements.

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What can you do? Aside from getting a law degree, how can you make it easier to understand what you're getting into with these card agreements? The best thing you can do is to pick up the phone.

If you run across a particular passage that doesn't make sense, call your credit card issuer and ask about it. While simply saying, "I don't understand any of this stuff. Can you explain what this whole thing says?" probably won't get you very far, calling with a specific question about a particularly confusing piece of the document is a smart move. After all, if you can't understand what the rules are, how are you supposed to abide by them?

The bottom line: No one should enter into any financial agreement without understanding at least the basic terms of that agreement. Banks and credit unions don't make it very easy to do that when they write credit card contracts in language that you need a doctorate to understand, but it is still important to make the effort. No one signs up for a credit card expecting things to go south once they get it, but it does happen. Jobs are lost. Medical emergencies arise. Life happens and can throw a wrench in your ability to pay your bills. If that happens, you'll be glad that you took the time to read your credit card agreement, even though it wasn't exactly easy or fun.

Matt Schulz is the senior industry analyst at CreditCards.com, a site dedicated to helping people make smart decisions about obtaining and using credit. You can follow him on Twitter at @matthewschulz.