The CARD Act: What it Does ... and Doesn't Do
The Credit Card Accountability Responsibility and Disclosure (CARD) Act was signed into law by President Obama in May 2009 and was scheduled to roll out in three phases over a 15-month period. The first phase went into effect on August 20, 2009, and included the new 45-day advance notice to cardholders regarding significant account changes or interest rate increases. It also required that issuers mail out statements 21 days (rather than 14 days) before the due date.
The second phase of the roll out, and the most extensive, went into effect on February 22, 2010. But what exactly does the CARD Act mean for consumers? Here's a quick rundown of the major provisions:
Interest Rate Increases:
- No more retroactive rate increases or universal default clauses. Credit card issuers will not be able to raise an interest rate on an existing balance unless the cardholder goes 60 days past due on the account.
- Credit card issuers will not be able to raise the interest rate on new accounts during the first year the account is opened and promotional rates must remain in effect for a minimum of 6 months.
What it doesn't do: It doesn't stop credit card issuers from raising your interest rate going forward, using variable interest rates that can go up (even on existing balances) when the index rises,closing your account, lowering your credit limit or increasing your minimum payment.
- Over-limit fees will only be allowed if the cardholder gives their consent prior to fees being charged. If the cardholder agrees to accept over-limit transaction fees, only one over-limit fee is allowed per billing cycle.
- Card issuers will not be allowed to charge additional fees to cardholders for accepting payments by mail, phone, or online -- but they will be able to charge a fee to expedite a payment.
- Payments received by the due date, even if the due date falls on a weekend or holiday, will not be charged a late fee as long as payment arrives the next business day. In addition, payments made at a local branch or office must be credited the same day.
- Sub-prime or "fee harvester" credit cards will have fee limits where non-penalty fees cannot exceed more than 25% of the credit limit when the account is opened.
What it doesn't do: It doesn't stop credit card issuers from charging other fees. For example, we've seen an increase in issuers now charging a mandatory annual fee and an 'inactivity' fee for users that don't use their cards enough.
- Credit card issuers will need to verify proof of income or otherwise require a co-signer before issuing a credit card to consumers between the ages of 18-21.
- Credit card issuers cannot send prescreened card offers to those under 21 unless they have consented to receive such offers.
- Card issuers cannot raise a credit limit on an account for persons under 21 with a co-signer without written permission from said co-signer.
- No more target marketing, with free gifts (t-shirts, frisbees) in exchange for a credit card applications, to college students on or near campus.
What it doesn't do: It doesn't provide any financial literacy requirement to teach college students about credit card or personal finance management.
Billing Cycle & Payment Allocation:
- Double-cycle billing, or the practice of calculating interest charges on both the current balance and the previous month's balance, will be banned.
- Any payment over the minimum balance due will be required to automatically be applied to the highest interest balance first.
Clear Account Disclosures:
- Credit card statements will be required to include a minimum payment disclosure that explains how long it will take to pay off the existing balance as well as the total cost in interest if the cardholder were to only pay the minimum amount due each month. They will also be required to include minimum payment and interest costs to pay off the existing balance within 3 years.
- Credit card issuers will be required to make account terms and cardholder agreements available for their cardholders online.
Free Credit Reports:
- All free credit report advertisements will require the disclosure that the report being offered is NOT the free credit report provided under Federal law at AnnualCreditReport.com. On February 23, the FTC ruled that all free credit report offers online have until April 1 to comply with this new disclosure requirement. Consequently, television and radio advertisements have until September 1 to comply.
There's no question that the CARD Act is a great step forward for consumer protection, but the work isn’t quite done yet. The remaining provisions will go into effect on August 22, 2010, and will give consumers the right to earn back their previous interest rate if they continue to make their payments on time for 6 months. Regulators will issue guidelines for what constitutes "reasonable and proportional" penalty fees. And the new rules that will limit fees on gift cards and prohibit them from expiring for the first 5 years will go into effect.
Even though the CARD Act is still working through the roll out, we've already seen signs that card issuers are finding other, more creative ways of imposing fees like inactivity fees and annual fees. This means consumers need to be more vigilant than ever when it comes to their credit cards. Be prepared to keep a very close eye on statements to watch for new account notices and changes.
To read a more in-depth analysis of the CARD Act, please see "Understanding the Credit Card Accountability Responsibility and Disclosure Act" in our Learning Center.