What is the CARD Act of 2009?

The Credit Card Liability and Disclosure Act of 2009, commonly referred to as the Credit Card Act, is a federal law that has revolutionized credit card issuer practices and consumer rights.

The law added new safeguards to the Truth in Lending Act, requiring issuers to be more clear with consumers about credit card terms and to warn cardholders before making certain changes to their accounts.

What is covered by the CARD Act?

The CARD Act covers many aspects of the credit card user experience. Through this law, cardholders are protected from retroactive interest rate increases on existing card balances and have more time to pay their monthly bills, more advance notice of changes to credit card terms, and the right to opt out of material changes to their account terms. .

The law gave consumers a little more time – 45 days instead of 15 – to look for better deals if they don’t like the new terms.

The law also limits some fees, cuts down on unfair billing practices, and limits credit card marketing to consumers under the age of 21.

“The most vulnerable consumers, those with a balance, were protected by the CARD Act,” says Chi Chi Woo, staff lawyer for the National Consumer Advocacy Center, a Boston-based consumer advocacy group. “Some of the most serious violations have been eliminated, including retroactive rate hikes. This has suspended some fees. They are still a little tall, but that’s holding them back from growing.”

Here is an overview of the highlights of the CARD Act.

Limited interest rate hike

Interest rate increases on existing balances are only permitted under limited conditions, such as when the 0% APR promotional rate ends.

The issuer must clearly inform the borrower of the interest rate increase after the end of the promotional period and the length of that promotional period before subscribing to the consumer for such promotion. This increased rate also cannot be applied to transactions made before the start of the promotion.

An interest rate increase can also occur if there is a variable rate or if the cardholder is in arrears.

The law also permits an increase in the interest rate after the borrower completes a settlement or withdraws from an “interim hardship agreement”, or fails to comply with the rules of any such settlement or agreement. The increased rate in these cases cannot be higher than the rate for such transactions before the start of processing or approval.

Interest rates on new transactions can only increase after the first year. Significant changes to the terms of accounts cannot occur without prior notice of the change 45 days in advance.

Limited universal default

“General default”, the practice of raising interest rates for customers based on their payment records with other unrelated credit issuers (such as utilities and other lenders), has been discontinued for existing credit card balances. Card issuers are still allowed to use universal default on future credit card balances if they give at least 45 days notice of the change.

Right to refuse

Consumers have the right to opt out (or reject) certain material changes to their account terms. Withdrawal means that cardholders agree to close their accounts and pay off the balance on the old terms. They have at least five years to pay off the balance.

Limited credit for young people

Credit card issuers are prohibited from issuing credit cards to anyone under the age of 21 unless they have adult guarantors on their accounts or can provide evidence that they have sufficient income to pay off the card debt.

Credit card companies must be at least 1,000 feet from college campuses if they offer free pizza or other gifts to encourage students to apply for a credit card. Issuers also cannot extend the lines of credit to these younger customers without a signed co-borrower agreeing to this extension and accepting joint and several liability. As a general rule, card issuers cannot open a credit account for anyone or increase a customer’s credit limit without checking their ability to repay the loan in accordance with the terms of the account.

Clearer deadlines, time

Issuers must allow card account holders a “reasonable amount of time” to pay monthly bills. This means that payments must be made at least 21 days after dispatch or delivery.

Credit card issuers can no longer set early mornings or other arbitrary due dates for payments. The cut-off time set before 17:00 on the due date is illegal. Payments due at this time or on weekends, holidays or when the card issuer is closed for business are not subject to late fees. The dates must match each month.

Monthly credit card statements should also have clear disclosure of due date and late payment fees.

The balances with the highest interest rate are paid first

When consumers have accounts with different interest rates for different types of transactions (for example, cash advances, recurring purchases, balance transfers, or ATM withdrawals), payments above the minimum amount must first be directed to balances with higher interest rates.

Previously, it was common practice in the industry to apply all amounts above the minimum monthly payments to balances with the lowest interest rates first, thereby increasing the time it takes to pay off balances with higher interest rates.

And if a card issuer makes any material change, such as changes to where to send payments or how it processes card payments, and that results in any delay in crediting a payment within a 60-day period after the change, the issuer cannot charge cardholder a fine or interest on the payment.

Restrictions on overlimit fees

Consumers must “agree” to exceed the charge limit. Those who refuse will have their transactions rejected if they exceed their credit limits, thus avoiding over limit fees. The commission cannot exceed the amount of the overdraft. For example, if the limit is exceeded by $20, the commission cannot exceed $20.

The issuer must notify those who opt for overlimit protection that they may opt out of this agreement if they so choose. An issuer may only charge one over-limit fee per billing cycle. However, the charge may apply once in each of the next two billing cycles if the consumer has not resolved the over limit issue.

No more double billing cycle

Funding charges on outstanding credit card balances must be calculated based on purchases made in the current cycle, so card issuers cannot go back to a previous billing cycle to calculate interest charges. So-called double-cycle or double-cycle billing is detrimental to consumers who pay off their balances because they faced financial charges from a previous cycle, even though they paid the bill in full.

However, this does not apply to any financial cost adjustments in connection with the resolution of a dispute or if a financial cost adjustment is necessary when returning a payment due to lack of money.

Rules for substandard cards

People who get subprime credit cards and charge account opening fees that eat into their available balances get some relief under the law. These advance payments cannot exceed 25% of the available credit limit in the first year of the card.

Such fees do not include late fees, penalties for exceeding the credit limit and penalties for chargebacks due to insufficient funds.

Card applicants still need to be careful: some issuers have started charging fees before opening accounts.

Disclosure of minimum payments

Credit card issuers must communicate to cardholders the implications of making only the minimum payments each month, namely how long it will take to pay off the entire balance if users only make the minimum monthly payment. Issuers must also provide information on how much users must pay each month if they wish to pay off their balances within 36 months, including the amount of interest.

Limitation of late payment fees

Late payments are capped at $29 for random late payments; however, the fee can go up to $40 if cardholders are late more than once every six months. The Consumer Financial Protection Bureau sometimes adjusts these fees based on inflation.

When the CARD Act went into effect, late fees were limited to $25 for initial default and $35 for additional late payments in subsequent six months.

Gift Card Expiration Rules

Gift cards cannot expire earlier than five years after they were issued. Consumers should be able to easily find conditions related to expiration. An inactivity fee may only be charged if the card has not been used for 12 months or more. Issuers can only charge one fee per month, but there is no cap on fees.

What is not covered by the CARD Act?

While the CARD Act represents a big step forward, it has some limitations. First, its protection only applies to personal credit cards; business and corporate cards are not regulated by this law. And there are several potential consumer pitfalls that the law does not address. This includes:

• Credit card companies still have plenty of room to raise interest rates. Issuers can raise rates on future card purchases and there is no limit to how high these rates can be. Also, if credit card accounts are subject to variable annual interest rates, as is the case in most cases, the applicable interest rates may increase as the prime rate increases.
• Consumers may still find that their ability to borrow is limited without notice. Credit card companies are free to close accounts and drastically reduce credit limits, and there is no requirement that they warn cardholders.
• Card issuers may still promote additional products, such as debt protection, that consumers may not want, need, or completely understand. The law does not restrict misleading marketing related to add-ons. It also does not provide consumers with accurate information about the terms and costs of additional identity theft protection programs.
• The law does not regulate incentive programs, which vary widely and may be difficult for consumers to compare. This does not prevent issuers from creating rewards that are difficult to qualify for, nor does it prevent them from modifying reward offers to be less valuable to cardholders.
• Security is another gap in the scope of the CARD Act. The law does not add any new measures to protect the personal data of cardholders and does not address unauthorized online transactions.

bottom line

The CARD Act requires more transparency from credit card issuers and makes it more possible for cardholders to leave before changes to their accounts go into effect. It also capped some fees and limited marketing to young people.

The law did not regulate business cards and left some features of the cards intact. But overall, it strengthened consumer rights and had a significant impact on the credit card industry.