ABSTRACT
People like to know and understand the total cost of credit products they are considering. They also like to know and understand products’ terms and features. Given these preferences, issuers of credit should market products with transparent features and simple pricing. That is not the case. In fact, over the last few decades we have seen a plethora of complex terms in products such as mortgage loans, credit cards and prepaid debit cards. As credit products have become ever more complex, consumers have more choices and can select products that satisfy their particular needs and preferences. No longer are borrowers limited to a 30-year, fixed-rate mortgage. If they know they will be moving in a few years, a three-year fixed-rate mortgage with a low interest rate that coverts to a 27-year adjustable-rate mortgage based on the London Interbank Offered Rate (LIBOR)2 might be the right product for them. However, for borrowers who do not understand the complexities of a ‘3-27’ mortgage loan, the low, initial interest rate could be a costly lure. Confusion is commonplace. In one study giving consumers a choice between two credit cards that varied only in terms of the annual fee and the interest rate, 40 per cent of the participants chose the more expensive card.3
