Consumer Guide: How the Credit CARD Act of 2009 Affects You
The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit CARD Act) was signed into law by President Obama on May 22, 2009. The law was designed to put an end to unfair credit card practices that had generated thousands of complaints to regulators and legislators. And while the Credit CARD Act contains a number of strong consumer protection provisions, it still leaves many consumers scratching their heads and wondering, "Okay, but what does it do for me?"
To help answer this question, we've put together an easy-to-understand consumer guide to the Credit CARD Act. What follows is section-by-section break down of each of the major provisions under the law, along with a plain English explanation of what each provision means for you.
Table of Contents:
Interest Rates & Account Changes
Student Card Protections
Payment Allocations & Billing Cycles
Enhanced Consumer Disclosures
Interest Rates & Account Changes:
- Credit card issuers are required to provide 45-day advance written notice of any interest rate increase or any other significant account changes, including annual fees, cash advance fees, late fees, etc.
- You have the right to ‘opt-out’, or decline interest rate changes and new account terms. The credit card issuer must give you 3 billing cycles to make your decision. If you do choose to ‘opt-out’, you have the right to cancel the card and repay the remaining balance at the current rate. However, you should be aware that your credit card issuer can legally require you to pay back your remaining balance over five years – or double your previous minimum monthly payments.
- Retroactive rate increases and universal default are banned.
- Credit card issuers cannot raise the interest rate on a new account during the first year that the account is opened, except for promotional rates which must remain in effect for a minimum of 6 months.
- If your credit card issuer does raise your interest rate after the first year, the new rate will only apply to new charges, except as below.
- Your credit card issuer cannot raise your interest rate on your existing balance unless you are 60 days past due on your account.
- If your rate was increased because of late payments, you must be given the opportunity to earn back your previous rate. By paying your account on time for six consecutive months, your credit card issuer must lower your interest rate back to the rate it was before the increase. Beginning August 22, 2010
- If your rate was increased after January 1, 2009 for any reason, beginning in February 2011, your card issuer must review your account every six months to determine whether the reasons behind the rate increase still apply. If not, they must reduce the rate, though there is no specific amount by which it must be lowered.
What you need to know: The new rules go a long way in limiting interest rate increases but they don’t stop them altogether. They also don’t stop your credit card issuers from closing your account, lowering your credit limit or increasing your minimum payment.
Caveat: There’s one major loophole with the 45-day notice requirement: variable interest rates. If your credit card has a variable interest rate, it means the interest rate is tied to an interest rate in the economy – such as the prime rate – and your interest rate will increase as the index increases. And guess what? Your credit card issuer doesn’t have to notify you in advance for variable rate increases.
- Credit card issuers cannot charge you an over-limit fee unless you consent to allowing over-limit transactions prior to the fees being charged. If you agree to accept over-limit transactions, only one over-limit fee per billing cycle is permitted.
- Card issuers may not charge additional fees for accepting payments by mail, phone or online – however, they can charge a fee to expedite a payment.
- If your due date falls on a weekend or holiday when payments are not accepted, your issuer cannot charge you a late fee if your payment arrives the next business day. In addition, payments made at a local office or branch must be credited the same day.
- "Fee harvester" or sub-prime credit card non-penalty fees cannot exceed more than 25% of the credit limit when you open the account.
- Your credit card issuer cannot charge a fee of more than $25 unless you were late with a payment in the last six months (in which case you may be charged up to $35); or the credit card issuer proves that the costs incurred as a result of your late payments justify a higher fee.
- Credit card issuers cannot charge you a late fee greater than your minimum payment. Beginning August 22, 2010
- Credit card issuers cannot charge you an inactivity fee for not using your card, including fees for not charging a certain amount each month. Beginning August 22, 2010
What you need to know: The provisions haven’t stopped credit card issuers from creating new fees or increasing existing fees on cash advances or balance transfers. The fact is, credit card issuers have taken a big hit in their proverbial wallets and they’re coming up with creative new ways to make up for the revenue they’ve lost under the new provisions.
Student Card Protections:
- Credit card issuers must verify proof of income or otherwise require a co-signer before issuing a credit card to consumers under the age of 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 the co-signer.
- Credit card issuers are prohibited from providing free items in exchange for applications when marketing to students on or near campus. The days of "credit card swag" (free t-shirts, frisbees), in exchange for credit card applications are over. Rewards programs offered with credit cards are still allowed, however.
What you need to know: While the new rules were designed to protect young consumers, they neglect one very important component – financial literacy requirements to teach college students about credit card and personal finance management. Without financial literacy requirements, 21-year-olds will be no more prepared to manage their credit cards than they were at 18.
Payment Allocations & Billing Cycles:
- Credit card issuers are required to mail your statement at least 21 days before your payment is due and your monthly due date must be the same date each month.
- Double-cycle billing, or the practice of calculating interest charges on both the current balance and the previous month's balance, is prohibited.
- Any payment over the minimum balance due must automatically be applied to the highest interest balance first.
What you need to know: Before a credit card issuer can open a new account, they must first take into account your ability to repay. A card issuer cannot open a new credit card account, or increase an existing credit limit, unless they first consider your ability to make the required payments under the terms on the account.
Enhanced Consumer Disclosures:
- Your credit card statements must now include a minimum payment disclosure that explains how long it will take you to pay off your existing balance as well as the total cost in interest if you only pay the minimum amount due each month. Additionally, your statement must include the monthly payment required, and interest cost, to pay off the existing balance in 3 years.
- Your credit card issuer must provide easy online access to the cardholder agreement for your account. Likewise, all credit card issuers are required to submit cardholder agreements to the Federal Reserve, which will act as the central repository. Find your credit card agreement with the Federal Reserve Consumer Credit Card Agreement Search tool.
- Companies that advertise "free" credit reports must disclose that the report being offered is NOT the free credit report provided under Federal law at AnnualCreditReport.com. (Read the FTC Ammendment)
What you need to know: If your credit card issuer raises your interest rate, they must tell you why. This means if the increase is due to market conditions, increased credit risk due to credit scores, or a decline in credit worthiness – they must provide up to four the reasons for the increase. Under separate legislation, issuers will also be required to provide consumers with the credit score used in making that decision. The effective date for credit score disclosures has not yet been determined.
- Gift cards, prepaid cards and gift certificates cannot expire within five years of activation, unless the terms and expiration are clearly disclosed before it’s purchased. If you load additional funds onto a card, the five year expiration period is extended by five years. Beginning August 22, 2010
- Prohibits issuers from charging a dormancy, inactivity, or service fee unless the card hasn’t been used in the past 12 months, and even then, no more than one fee can be charged per month. Beginning August 22, 2010
- All gift cards are required to include disclosures that outline the gift card protections under the CARD Act. This section of the provision has been delayed under the “Eco Gift Cards Act.” (Delayed)
What you need to know: Expiration provisions do not cover prepaid phone cards, reloadable cards not meant to be used as gifts, award cards, loyalty cards, or gift certificates issued in paper form. Before you purchase a gift card, prepaid card or gift certificate, it’s a good idea to review the disclosures to make sure you know the terms and possible limitations.
The remainder of the provisions under the Credit CARD Act pertain to deceptive practices on loan modification and foreclosure services within the mortgage industry; a number of studies for Congress to review credit card industry practices and recommend new provisions as needed; and even a completely unrelated provision prohibiting the possession of firearms while visiting U.S. National Parks and Wildlife Refuges. (SEC. 501- SEC. 513)
Please note: This summary is neither an exhaustive list of the new law’s provisions, nor should it be construed as legal advice. Read the entire law here.
For a list of implementation dates for the provisions, Rep. Carolyn Maloney provides a simple breakdown in this downloadable [pdf].