What the credit card reform law means to you

A primer on how the Credit CARD Act has changed the rules

By Connie Prater

Credit card reform: What the law has meant
Limited interest rate hikes Limited universal default The right to opt out Limited credit to young adults More time to pay bills Clearer due dates and times Highest interest paid first Limits on over-the-limit fees No double-cycle billing Making minimum payments Subprime card fee limits Late fee restrictions Gift card expirations limited
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Credit card users are benefiting from the most comprehensive consumer protections on credit terms, interest rates and fees in decades thanks to a federal law that took effect beginning in 2009.

After years of complaints about "gotcha" fine print and confusing terms, the reform law mandated more transparency and easier-to-understand terms -- but it has come at a higher upfront cost.

"The most vulnerable consumers, those who carry a balance, have been protected by the protections of the CARD Act," says Chi Chi Wu, staff attorney for the National Consumer Law Center, a Boston-based consumer advocacy group. "Some of the worst abuses were addressed, including retroactive rate increases. It put the brakes on some of the fees. They are still kind of high, but it kept them from going up."

The new normal
Now that a few years have passed, credit card issuers and credit industry analysts say the credit card reform law has made credit cards somewhat more costly for all users and less accessible for people with low income and bad credit. However, the direst predictions -- that the law would mean the return of routine annual fees and fewer rewards cards -- have not panned out.

President Obama signed the Credit CARD Act of 2009 into law May 22, 2009. (Read the act.) The law directed several federal agencies to work out the fine details of enforcement, and they did so over the two years following the CARD Act's enactment.

In the end, what has the law meant for cardholders? Millions of credit card users are protected from retroactive interest rate increases on existing card balances and have more time to pay their monthly bills, greater advance notice of changes in credit card terms and the right to opt out of significant changes in terms on their accounts. The law gave consumers a bit more time -- 45 days instead of 15 -- to shop around for better deals if they don't like the new terms.

The CARD Act's consumer protections were phased in over 15 months. The first provisions took effect Aug. 20, 2009, and the majority of rules started on Feb. 22, 2010, while the final batch kicked in Aug. 22, 2010.

Here are the highlights of the credit card law:

Limited interest rate hikes: Interest rate hikes on existing balances are allowed only under limited conditions, such as when a promotional rate ends, there is a variable rate or if the cardholder makes a late payment. Interest rates on new transactions can increase only after the first year. Significant changes in terms on accounts cannot occur without 45 days' advance notice of the change.

Limited universal default: "Universal default," the practice of raising interest rates on customers based on their payment records with other unrelated credit issuers (such as utility companies and other creditors), has ended 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.

The right to opt out: Consumers have the right to opt out of -- or reject -- certain significant changes in terms on their accounts. Opting out means cardholders agree to close their accounts and pay off the balance under the old terms. They have at least five years to pay the balance.

Limited credit to young adults Credit card issuers are banned from issuing credit cards to anyone under 21, unless they have adult co-signers on the accounts or can show proof they have enough income to repay the card debt. Credit card companies must stay at least 1,000 feet from colleg campuses if they are offering free pizza or other gifts to entice students to apply for credit cards.

More time to pay monthly bills: Issuers have to give card account holders "a reasonable amount of time" to pay on monthly bills. That means payments are due at least 21 days after they are mailed or delivered. Before the law was enacted, consumers complained about due dates that changed without notice or were moved up, giving them less time to pay their bills and increasing the likelihood of late fees.

Clearer due dates and times: Credit card issuers are no longer able to set early morning or other arbitrary deadlines for payments. Cutoff times set before 5 p.m. on the payment due dates are illegal. Payments due at those times or on weekends, holidays or when the card issuer is closed for business are not subject to late fees. Due dates must be the same each month.

Highest interest balances paid first: When consumers have accounts that carry different interest rates for different types of purchases (i.e., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first. A common practice in the industry had been to apply all amounts over the minimum monthly payments to the lowest-interest balances first -- thus extending the time it takes to pay off higher-interest rate balances.

Limits on over-limit fees: Consumers must "opt in" to over-limit fees. Those who opt out will have their transactions rejected if they exceed their credit limits, thus avoiding over-limit fees. Fees cannot exceed the amount of overspending. For example, going $20 over the limit cannot have a fee of more than $20.

No more double-cycle billing: Finance charges on outstanding credit card balances must now be computed based on purchases made in the current cycle rather than going back to the previous billing cycle to calculate interest charges. So-called two-cycle or double-cycle billing hurts consumers who pay off their balances, because they are hit with finance charges from the previous cycle even though they have paid the bill in full.

Subprime credit cards for people with bad credit: People who get subprime credit cards and are charged account-opening fees that eat up their available balances get some relief under the new credit card law. These upfront fees cannot exceed 25 percent of the available credit limit in the first year of the card. Instead of charging high upfront fees, some issuers are charging high interest rates on these high credit risk accounts. After a subprime credit card issuer filed suit in federal court challenging the fee cap, the Consumer Financial Protection Bureau (CFPB) announced plans to allow unlimited fees before accounts are opened.

Minimum payments: Credit card issuers must disclose to cardholders the consequences of making only minimum payments each month, namely how long it would take to pay off the entire balance if users only made the minimum monthly payment. Issuers must also provide information on how much users must pay each month if they want to pay off their balances in 36 months, including the amount of interest.

Late fee restrictions: Late fees are capped at $25 for occasional late payments; however, the fees can be higher if cardholders are late more than once in a six-month period.

Gift cards: Gift cards cannot expire sooner than five years after they are issued. Dormancy fees can only be charged if the card is unused for 12 months or more. Issuers can charge only one fee per month, but there is no limit on the amount of the fee.

Law doesn't cover everything
Although the reforms were dramatic, they do not protect card users from everything. Issuers can still raise interest rates on future card purchases and there is no cap on how high interest rates can go. Business and corporate credit cards also are not covered by the protections in the CARD Act. If credit card accounts are based on variable APRs (as the vast majority now are), interest rates can increase as the prime rate goes up. Credit card companies can also continue to close accounts and slash credit limits abruptly, without giving cardholders advance warning. Many banks are finding ways around the law and launching new fees not specifically banned by the credit card reform law.

Not everyone has been aided by the new law. Stay-at-home parents found that they were penalized by a provision that requires issuers to assess the rule ability of the card applicant to repay their debt before opening a new account. A Federal Reserve rule required issuers to consider only individual rather than household income. Parents who don't work complained to lawmakers that this was unfair. The CFPB is reviewing the rule.

Updated: June 13, 2012

See related: Winners and losers 3 years after Credit CARD Act, Final Credit CARD Act changes take effect Aug. 22, 2010, Credit card reform and you, Interactive timeline: The road to credit card reform and future effective dates of the law, What the new credit card rules don't cover, Interactive look at what new monthly credit card statements would disclose,New credit card rules don't cover business, corporate credit cards,Fed caps credit card late fees at $25