Research and Statistics

Credit CARD Act begins final phase


Gift card protections, requirements for reasonable fees and mandatory account reviews when interest rates are hiked are among the new consumer protections in Phase III of the Credit CARD Act of 2009.

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Credit card users got yet another layer of consumer protections when the third and final phase of the Credit CARD Act began Aug. 22, 2010.

Phase III of the credit card reform law reins in high penalty and late fees, extends the life of gift cards and gives consumers who have been rate jacked a chance to roll their rates back to previous levels if they’ve been good and paid their bills on time for six months.

“Consumers are tired of getting stung by unreasonably high fees and getting penalized for such dubious reasons as not using their credit card enough,” Pamela Banks, senior policy counsel for Consumers Union, the nonprofit owners of Consumer Reports magazine, said in a statement. “These new protections will prohibit so-called inactivity fees and help put an end to excessive credit card fees that unfairly penalize consumers when they are late making a payment.”

Among the new protections and rules:

  • Inactivity fees on credit card accounts are banned, although the issuer can close your account if it is not being used.
  • Card issuers must give the reason why an interest rate is increased, such as market conditions changing.
  • Fees for going over your credit limit cannot exceed the amount of overspending. In other words, going $20 over the credit limit can only trigger a fee of $20 or less. As of Feb. 22, 2010, the CARD Act required banks and credit unions to get customers’ permission — called “opting in” — before charging over-limit fees.
  • Occasional late fees are capped at $25. Late fees can be higher if cardholders are late more than once in a six-month period.
  • Multiple fees on a single violation of the credit card agreement are banned. For example, you cannot be charged both a late fee and a returned payment fee for the same incident.
  • Card issuers are required to do a six-month review of accounts that have had interest rate hikes since January 2009, and, if warranted, consider lowering the interest rate. The first of the six-month rate reviews must be completed by Feb. 22, 2011. However, in most instances, the law doesn’t require them to reduce the rate.
  • Gift cards cannot expire for at least five years. Starting Jan. 31, 2011, gift card issuers must give consumers additional disclosures about gift card rules and fees.
  • Gift cards cannot incur dormancy fees, unless they have been unused for 12 months. There is a limit of only one fee per month, but there is no limit on the amount of the fee.


“The new reforms put consumers squarely in the driver’s seat by restricting fees and requiring clearer rules and improved disclosures,” according to Kennth J. Clayton, senior vice president and general counsel for card policy at the American Bankers Association trade group. “Better information allows for better choices, and we believe the new law will make it easier for consumers to understand and meet their credit obligations.”

Historic credit card law
Signed into law by President Obama on May 22, 2009, the Credit CARD Act contains the toughest credit card regulations in the history of the industry. Provisions of the law were phased in over about a 15-month period.

Consumers are tired of getting stung by unreasonably high fees and getting penalized for such dubious reasons as not using their credit card enough.

— Pamela Banks
Consumers Union

The first provisions began in August 2009 and included giving consumers at least 45 days advance warning of significant changes to their accounts. It also required banks and credit unions to give cardholders at least 21 days to pay their monthly credit card bills and allow them to opt out of certain changes to the account terms.

The second and most significant phase of the new law protects cardholders from surprise interest rate hikes. It began Feb. 22, 2010, and bans interest rate hikes on existing credit card balances except under a limited number of circumstances, such as when a cardholder is more than 60 days late paying a bill or if the account has a variable interest rate.

One consumer group noted that more could be done to help protect cardholders against penalty interest rate hikes.

“While we applaud the final implementation of this important legislation, more should be done to protect customers from harmful credit card practices,” Nick Bourke, director of the Pew Health Group’s Safe Credit Cards Project, said in a statement. “The regulators missed a chance to form comprehensive penalty interest rate protections. Though the rules created some important safeguards, the Federal Reserve refused to control the size or duration of penalty rate increases on existing balances. We urge them to ensure that all credit card penalties are reasonable and proportional.”

See related:A guide to the Credit CARD Act of 2009, Feds cap credit card late fees at $25, Feds issue final rules protecting gift card users, Time line to credit card reform

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