2006 Articles

"Contracting" for Credit

Mann, Ronald

The Essay begins in Part I with a summary of the problems presented by standardized terms in consumer transactions. Part II describes the contracting practices that dominate the modern credit card industry. I argue that sophisticated card issuers have learned to exploit the boilerplate features of their agreements to produce a set of dynamic contracting obligations that even sophisticated cardholders could not understand. Finally, Part III analyzes several potential responses. First, I briefly explain my thoughts on several proposals mentioned in the literature. In general, those proposals are designed to improve consumer decisionmaking without limiting consumer choice. I generally conclude that those proposals are not likely to be effective. Then, I discuss choice-limiting responses that have been used effectively in other consumer finance contexts. I argue in favor of prohibiting terms that alter the consequences of borrowing after the fact. Those terms make it very difficult for consumers to take account of the borrowing costs at the time of their purchasing and borrowing decisions. More broadly, I propose a centrally promulgated set of standardized terms that would leave businesses free to compete on the key financial terms that consumers are most likely to understand.