On May 22, 2009, the Credit CARD Act of 2009 was signed into law by President Barack Obama. The full title of the law — Public Law 111-24 — is the Credit Card Accountability Responsibility and Disclosure Act of 2009. It amends the Truth In Lending Act, the Federal Trade Commission Act and the Electronic Funds Transfer Act.
The Credit CARD Act is an important piece of consumer legislation for several reasons. As the Consumer Financial Protection Bureau explains on the Consumerfinance.gov website, the law serves as a Bill of Rights of sorts for credit card holders, prohibiting practices that are unfair or abusive, such as slapping fees for going over a limit or imposing a fee without warning. At its most basic level, the law seeks to make rates and fees on credit cards more transparent so consumers can see what they’re getting and make smarter financial decisions.
In this article, we’ll provide an overview of the main provisions of the Credit Card Act so you can understand how it helps you. Keep in mind there are numerous sections of the law where the Federal Reserve Board — referred to as the Board from here on — often with the cooperation of other regulatory agencies will be required to develop rules that describe how the law will work in real life. In other words, this is not the final word on this legislation and is only meant to help you understand it, not provide a legal interpretation.
How the Credit CARD Act Protects You
Credit Card Issuers Must Alert You to Rate Increases
Credit card issuers must notify you of a rate increase — or any other significant change in terms to your credit card account — at least 45 days in advance. (The Board will develop rules that address what a “significant change” means.) This notice must be clear and conspicuous, and give you the opportunity to close the account. If you decide to close your account to avoid the new terms, issuers won’t be able to charge a penalty fee for closing your account, place you in default because you close your account while you still owe a balance, or require you to pay your balance in full immediately. If your card issuer does raise your rate (or says it will) and you close your account, your card issuer can require you to pay back your balance over five years or double your previous minimum monthly payment.
Retroactive Rate Increases Are Prohibited
Issuers cannot increase the annual percentage rate, fee or finance charge on your existing credit card balance except in certain circumstances. Your rate can go up if the rate you were given was clearly disclosed as lasting for a certain period of time. For example, your card issuer could offer an introductory rate if you were told what the new rate would be after that period expired. Promotional rates must last for at least six months unless the Board creates other rules.
Variable rate cards (which change as the underlying index changes) are still permitted. For example, if your interest rate is based on the prime rate, plus 5.99%, adjusted annually, your rate will change if the prime rate does. A credit card issuer may raise the rate on your outstanding balance if it has been temporarily lowered during a “workout” or temporary hardship arrangement that you either completed or left.
If you are 60 days late on a credit card payment, your issuer can raise your interest rate retroactively. However, you must be given the opportunity to earn back your previous rate if you make your minimum payments on time for six months. (You can learn the downsides of paying your credit card bill late. You can also see how late payments are affecting your credit by viewing two of your credit scores for free on Credit.com.) Remember, an issuer cannot raise your rate on your credit card in the first year except in the circumstances above, such as with an introductory interest rate or if you fall 60 days or more behind.
Interest Rate Reductions
If a credit card issuer increases your annual percentage rate based on factors such as your credit risk as a borrower or market conditions, the creditor shall consider changes in those factors when determining whether to reduce your annual percentage rate. Every six months (at minimum), issuers must review accounts on which they raised the interest rate since Jan. 1, 2009 to assess whether the facts they used to raise the interest rate have changed. If so, they must lower your rate.
Let’s say your card issuer raised your rate due to a decline in your credit score. If a year later your credit score is back to where it was when they first raised your rate, the card issuer would likely be required to lower your rate. This section of the law can clearly get complicated, so the Board must issue final rules describing how this will work no later than nine months after enactment, and this section will go into effect 15 months after the date of enactment.
Double Cycle Billing and Other Fees Are Prohibited
Two cycle, or double cycle, billing (the practice of calculating interest charges on both the current balance and the previous month’s balance) is banned. Likewise, issuers cannot charge a fee if you go over the limit on your credit card unless you have given them permission to authorize purchases that put you over your limit. Issuers cannot charge an over-the-limit fee if you go over the limit solely due to interest charges or fees.
If the issuer does authorize a purchase that puts you over your limit, you cannot be charged an over-the-limit fee unless you opted to go over the limit. (This does not require card issuers to allow you to go over your limit. They are still free to decline purchases above your credit limit.)
When over-the-limit fees are permitted, an issuer cannot charge an over-the-limit fee more than once per billing cycle. If you only go over the limit that one time (and don’t continue making purchases that put you over your limit), you cannot be charged over-the-limit fees for more than three months in a row, even if your required minimum payments don’t bring you under the limit.
Other Fee Regulations
Payment Fees: Issuers can’t charge fees for accepting payment by mail, electronic transfer, telephone authorization, or other means unless the payment involves an expedited service by a representative of the creditor.
Reasonable Fees: Late payment fees, over-the-limit fees, or any other penalty fees or charges, must be reasonable and in proportion to the violation. The Board will work with banking regulators to develop guidelines on what is reasonable.
Credit card issuers cannot charge you an inactivity fee for not using your card or not charging a certain amount each month. Your credit card issuer also 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.
Fixed Rate Means Fixed: If a credit card company offers a fixed interest rate, the rate must not change or vary for any reason over the period specified clearly and conspicuously in the terms of the account.
If portions of your balance are at different interest rates, any payment in excess of the minimum payment must be credited first to the balance with the highest interest rate, then to each successive balance bearing the next highest rate of interest until the payment is exhausted.
If you have a deferred interest arrangement (“buy now, pay later” or “interest free for six months,” for example), the creditor must allocate the entire amount you’ve paid above the minimum payment to the balance on which interest is deferred during the last two billing cycles immediately preceding the expiration of the period during which interest is deferred. (Essentially, this gives you the opportunity to pay off your deferred interest balance without having to pay off your entire balance if you have other outstanding balances at different rates.)
Changes by Card Issuer: If a card issuer makes a material change in the mailing address, office or procedures for handling cardholder payments and this change causes a material delay in crediting your payment during the 60-day period following the date on which that change took effect, the card issuer may not impose any late fee or finance charge for a late payment.
Subprime or “Fee Harvester” Credit Cards
Fees on a credit card (not including late fees, over-the-limit fees, or returned check fees) cannot exceed 25% of the credit limit when the account is opened.
Statement Delivery and Due Dates
Statements must be mailed or delivered to a consumer at least 21 days before the due date. If you did not receive your statement, there is a federal law that protects you, but make sure you know and follow the rules.
If a due date falls on a holiday or weekend when payments are not received or accepted by mail, the creditor cannot count a payment late if it is received the next business day. Payments received by 5 p.m. must be credited the same day. If a card issuer accepts payments at branch locations, they must be credited the day they are received at the branch. If your credit card carries a grace period, your statement must be mailed or delivered to you at least 21 days before the due date. Floating due dates, or due dates that change from time to time, are no longer allowed.
Credit Card Issuance
Credit card issuers cannot extend or increase a credit limit without considering the borrower’s ability to repay the debt.
Payoff Timing Disclosures
Credit cards must contain a warning: “Minimum Payment Warning: Making only the minimum payment will increase the amount of interest you pay and the time it takes to repay your balance,” or a similar statement developed by the Board. The card issuer will also be required to tell you how long it will take and how much it will cost to repay your balance if you only make minimum payments. They must also tell you how much you must pay in order to pay off your balance in three years or less and supply a toll-free number where you can get information about credit counseling and debt management services.
Late Payment Deadlines and Penalties
If the issuer imposes a late fee, it must be clearly disclosed on your statement. And if the card issuer will raise your interest rate because you make a payment late, the new interest rate must also be clearly disclosed on the statement. Credit card issuers cannot charge you a late fee greater than your minimum payment.
Internet Posting of Credit Card Agreements
Creditors will be required to create and maintain a website on which they post copies of cardholder agreements. Copies must also be given to the Federal Reserve Board, which will maintain a central repository of consumer credit card agreements and make them easily accessible to the public.
Prevention of Deceptive Marketing of Credit Reports
Advertisements for free credit reports must clearly disclose that free credit reports are available under federal law at AnnualCreditReport.com. Television and radio ads must disclose, “This is not the free credit report provided for by federal law.” The Board will develop rules that detail the requirements in this section.
Procedure for Timely Settlement of Estates of Decedent Obligors
The Board, along with the Federal Trade Commission and other agencies, will develop regulations that require credit card issuers to establish procedures to ensure that any administrator of an estate of a deceased debtor can resolve outstanding credit balances in a timely manner.
How the Credit CARD Act Protects Young Consumers
No credit card may be issued to a consumer under the age of 21 unless he has submitted a written application to the card issuer that meets the following requirements:
- The signature of a cosigner, including the parent, legal guardian, spouse, or any other individual over 21 with the means to repay debts incurred by the consumer on the account.
- Financial information indicating the person under the age of 21 has the ability to independently repay the debt.
- If a parent or other adult has cosigned a credit card to someone under the age of 21, the card issuer may not increase the credit limit on the account without the cosigner’s written approval.
Prescreened credit offers may not be sent to those under the age of 21 unless they have opted in with credit reporting agencies.
Colleges and universities must publicly disclose contracts or agreements made with a card issuer or creditor for the purpose of marketing a credit card. What’s more, card issuers and creditors may not offer a student at an institution of higher education any tangible item to get them to apply for a credit card if the offer is made on or near campus or at an event sponsored by or related to the college or university. Colleges and universities will also be encouraged to limit on-campus marketing of credit cards and offer credit card and debt education and counseling sessions as a part of orientation.
In addition, creditors will be required to submit a report to the Board describing the terms and conditions of all business, marketing and promotional agreements and college affinity card agreements with colleges and universities, alumni organizations, or foundations affiliated with or related to such institutions, with respect to any college student credit card issued to a college student at such an institution.
The Comptroller General of the U.S. will from time to time review these reports and periodically submit a report to Congress on the impact of these arrangements have on credit card debt. The Comptroller General will make legislative or administrative recommendations it determines to be appropriate.
In general, issuers cannot impose a dormancy, inactivity or service fee with respect to a gift certificate, store gift card or general-use prepaid card unless there has been no activity in the previous 12 months, required disclosures (describing fees) have been made, and no more than one fee is charged per month. Also, it is generally illegal to sell or issue a gift certificate, store gift card or general-use prepaid card that is subject to an expiration date unless the expiration date is at least five years away and the terms of expiration are clearly and conspicuously stated.
Board Review Of Consumer Credit Plans And Regulations
No later than two years after the effective date of this Act and every two years thereafter, except as provided in subsection (c)(2), the Board shall conduct a review, within the limits of its existing resources available for reporting purposes, of the consumer credit card market, that includes:
- The terms of credit card agreements and the practices of credit card issuers
- The effectiveness of disclosure of terms, fees, and other expenses of credit card plans;
- The adequacy of protections against unfair or deceptive acts or practices relating to credit card plans
- Whether or not, and to what extent, the implementation of this Act and the amendments made by this Act has affected cost and availability of credit, (particularly with respect to non-prime borrowers); the safety and soundness of credit card issuers; the use of risk-based pricing; or credit card product innovation
- Comments will be solicited from consumers, credit card issuers and other interested parties through hearings or written comments. A summary of this review will be published, and the Board will either propose new or revised regulations or interpretations to update or revise disclosures and protections for consumer credit cards as appropriate or state the reason for the determination of the Board that new or revised regulations are not necessary.
This article has been updated. It was originally published June 1, 2009.