The Credit Card Accountability Responsibility and Disclosure Act (or the Credit CARD Act) was passed in 2009 to rein in deceptive and abusive practices by credit card companies and give consumers a better understanding of the rates and fees they were paying every month.
The CARD Act is often referred to as the Credit Cardholders Bill of Rights. It is an offspring of the Truth in Lending Act, whose original purpose was to help consumers understand the true cost of credit. The CARD Act reintroduced the idea of fair and transparent practices to credit companies by regulating the underwriting and pricing of credit cards. The law took specific aim at a range of requirements for credit card companies that prevent them from doing things like giving credit without assessing a consumer’s ability to pay, arbitrarily raising interest rates for being a day late with payment, or allowing a consumer to go over the limit with a card before imposing a fee for doing so.
Those were just some of the tactics card companies used to take advantage of consumers before the CARD Act became law. It was common practice to hit consumers with upfront fees when they signed up and get them again on the back end if they were late with payments or went over the card’s credit limit.
Most of the abuses were addressed in the Act, but credit cards still have a strong influence on shopping, credit scores, family budgets and virtually every aspect of the financial life in the U.S. today. History suggests there will be more rules and regulations needed in the years to come.
Interest Rate Increases
The CARD Act limits the ways a credit card company can hike the interest rate on your credit card. Prior to the law, some consumers experienced what government officials called “arbitrary” rate increases if balances exceeded a certain level.
The Act orders a credit card company to give a cardholder 45-day notice before implementing any interest rate increase. When an official notice is sent, the company is required to tell the customer about his or her right to opt out of the agreement. The new interest rate can’t be applied to the account until the date set by the 45-day notice.
Another way that the act limits interest rate changes is by prohibiting “universal default,” which is when a card company increases your interest rate because you defaulted on a loan from another lender. Under the new law, a credit card company can only raise your rates for action directly related to your existing credit card debt.
Late Payment Policies
Another major issue addressed by the CARD Act is how credit card companies handle the timing of payments by cardholders.
Before the law was passed, consumer advocates reported that credit card companies were:
- Changing monthly payment due dates arbitrarily
- Changing the times of day that were considered “on-time payment”
- Using other dubious methods to categorize late payments or defaults
Studies indicated that abuses like those were costing consumers as much as $21 billion a year. Some of the provisions of the CARD Act limit this kind of irregular assessment of payments.
The law also set up other guidelines for credit card companies to follow. Those are:
- Making sure any payment due date is the same day of each month
- Ensuring a date does not come on a weekend or holiday and thus cause a late fee
- Honoring any payment made before the end of a business day
- Ensuring that if a credit card company changes its mailing address or its accepted method of payment, it cannot consider payments late if they are made within a certain time window
Gift Cards and the CARD Act
The CARD Act granted greater protection in the purchase and use of electronic cards, gift certificates and store gift cards by requiring expiration dates and limiting fees.
These items can’t have an expiration date sooner than five years from the date of purchase. The terms for an expiration date must appear conspicuously on the card.
In addition, companies can’t impose “dormancy” or “inactivity” fees on electronic gift cards, store cards or gift certificates unless they haven’t been used for more than one year. No more than one fee may be applied to a “dormant” card and the terms for that penalty must appear conspicuously on every card or certificate.
Double-Cycle Billing and Late Payment Policies
Double-cycle billing was one way that card companies took advantage of consumers, but it has been eliminated by the CARD Act.
Double-cycle billing is when card companies use the average daily balance on the current billing cycle and the previous billing cycle to calculate the interest charged on your account. This essentially meant that you had no grace period to pay off your bill. If you paid off last month’s bill, you would still be charged interest on the amount you paid.
Late payment violations and late fees were another place the card companies ratcheted up profits. Not now.
The CARD Act says that due dates for payments must fall on the same day every month, unless that day is a weekend or holiday. Consumers should receive their monthly statements at least 21 days prior to when the payment is due.
The Act limits late fees to $25 for the first violation and $35 for each violation thereafter for six months. The total late fees assessed may not exceed the minimum payment due.
Marketing to Young Consumers
Credit card companies used targeted marketing materials like t-shirt giveaways to aggressively market to youth, especially those on college campuses, but the CARD Act restricted that greatly.
Students and those from low-income areas, neither of whom had much experience with credit, would sign up for credit cards and spend their way into unsustainable debt.
The CARD Act restricts on-campus or near-campus marketing of credit cards. Any applicant under 21 must demonstrate an independent ability to make payments or have someone 21 or older (i.e. someone who has the means and ability to pay) co-sign the agreement.
Card companies also can’t send pre-approved card offers to anyone under 21, unless the individual agrees to receive them.
In addition to its nuts-and-bolts financial regulations, the Credit CARD Act of 2009 includes some broader protections.
Credit card companies must disclose long-range terms for its accounts. They must spell out for a customer the period of time and total interest charged for someone to pay off the card if they only make the minimum monthly payment.
In addition, companies cannot change so-called “over-the-limit” fees without the terms being made clear ahead of time. Customers must know in advance — and opt in — for what amounts to overdraft protection and additional fees charged to their account.
Another provision relates to the companies’ transparency. The CARD Act requires credit card companies to show the terms of their agreements clearly, without deceptive fine print or other gimmicks.
Exceptions to CARD Act
While the CARD Act provided several protections for consumers, there are still some areas where card companies have a lot of power and there is nothing the consumer can do to stop them from using it.
For example, a card issuer can close your account or lower your credit limit for any reason.
It is one thing to have your account closed or credit limit reduced if you consistently exceed your credit limit, constantly make late payments or default. However, card companies can look at your credit report and if they see something they don’t like, they can close your account with no notice!
The reason could be a) you haven’t used it for several months; b) your credit score plunged for some reason; c) your debt load increased a huge amount and you look like you’re in over your head; or d) they just didn’t want you as a customer anymore.
Closing your account or reducing your credit limit may not affect your credit score, but if you don’t replace the card, your credit score could be dinged because your credit utilization ratio would climb dramatically.
It should also be noted that business credit cards are exempted from all provisions of the CARD Act.
Effectiveness of CARD Act
One of the less-known provisions of the CARD Act is that it requires a government agency to do studies on the law’s effectiveness. That responsibility originally fell to the Federal Reserve and General Accounting Office, but was passed on to the Consumer Financial Protection Bureau, which publishes its studies every two years.
The findings of the first study done in 2012 were that it afforded great financial benefits to consumers. The CARD Act essentially eliminated over-the-limit penalties, which dropped from a 48.9% incidence rate in 2008 to just 3.4% in 2012. That produced a savings of $2.5 billion for consumers.
The average late fee, which was $33.08 in 2008, dropped to $26.84 in 2012, or $1.5 billion less in late fees paid by consumers. Also, the number of accounts that had their interest rates raised went from 15% per year to just 2%.
A separate study conducted by The Social Science Research Network (SSRN) confirmed that consumers have gained dramatic financial advantages since the CARD Act was passed. The SSRN study, published in 2013, estimated the consumer savings to be $20.8 billion per year.
The most recent CFPB study, published in December of 2015, reiterated most of the same facts: costs for using cards declined, fees remained low, costs to consumers are more predictable and transparent, and cards are more available to all segments of the population.
However, the latest CFPB study did raise concerns about the ultimate costs of deferred interest products (better known as balance transfer cards), variable interest rates on many credit cards, and the fees incurred by consumers with subprime credit cards.