The 2009 credit card reform law made sweeping changes. Here are its 12 biggest consumer protections.
The Credit Card Accountability Responsibility and Disclosure Act of 2009, commonly called the CARD Act, is a federal law that fundamentally changed credit card issuers’ practices and consumers’ rights.
Here is a brief guide to its history and its 12 biggest consumer protections.
2009 Credit CARD Act: 12 consumer protections
- Limited interest rate hikes
- Limited universal default
- The right to opt out
- Limited credit to young adults
- Clearer due dates, times
- Highest interest balances paid first
- Limits on over-limit fees
- No more double-cycle billing
- Subprime card rules set
- Minimum payments disclosure
- Late fee restrictions
- Gift card expiration rules
See related: Credit card law doesn’t cover business, corporate credit cards
CARD Act timeline
- Prior to this legislation, the Truth in Lending Act did require lenders to provide disclosures about the terms of credit. However, there were no checks on actual pricing of the credit.
- The Federal Reserve had come up with some rules in 2008 to protect consumers from credit card issuers’ misleading tactics, but the CARD Act superseded those changes which would have gone into effect only in July 2010, after this legislation was passed.
- Carolyn Maloney (D-N.Y.) initially introduced the legislation in the 110th Congress as the “Credit Cardholders’ Bill of Rights.” However, it didn’t go through the Senate at that time and was reintroduced in 2009.
- Congress passed and President Barack Obama signed on May 22, 2009 the reform law, which mandated more transparency and easier-to-understand terms. 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.
- 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.
What has the law meant for cardholders?
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 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.”
CARD Act highlights
Here are the highlights of the credit card law:
1. Limited interest rate hikes
Interest rate hikes on existing balances are allowed only under limited conditions, such as when a 0% APR promotional rate ends.
The issuer should clearly inform the borrower about the interest rate going up after the promotional period ends, and the length of this promotional period, before signing up the consumer for such a promotion. This increased rate also doesn’t apply to transactions that occurred prior to the beginning of the promotion.
Interest rate hikes could also come about if there is a variable rate or if the cardholder makes a late payment.
The law also permits an interest rate hike after the borrower completes a workout or exits a “temporary hardship arrangement,” or doesn’t comply with the rules of any such workouts or arrangements. The hiked up rate in these cases cannot be higher than the rate on such transactions before the workout or arrangement began.
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.
2. 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), was 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.
3. 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.
4. 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 college campuses if they are offering free pizza or other gifts to entice students to apply for credit cards. Issuers also cannot extend these younger consumers’ credit lines without the co-signor’s signed consent to this increase, and acceptance of joint liability. In general, card issuers cannot open a credit account for anyone, or extend a customer’s credit limit, without looking into their ability to repay under the terms of the account.
5. Clearer due dates, times
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.
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.
There should also be clear disclosures on monthly credit card statements about the date a payment is due, and about the fee for late payments.
6. 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.
And if the card issuer makes any significant changes such as mailing address to send payments or its ways of handling card payments, and this results in any delay to the payment being credited in a 60-day period following the change, the issuer cannot charge the cardholder a fine or interest on such payment.
7. 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 carry a fee of more than $20.
The issuer should notify those who opt into over-the-limit protection that they can choose to opt out of this arrangement if they choose to. The issuer can impose only one over-the-limit fee in a billing cycle. However, the fee could apply once in each of the two following billing cycles unless the consumer has resolved the over-the-limit issue.
8. No more double-cycle billing
Finance charges on outstanding credit card balances must 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.
However, this does not apply to any adjustment to a finance charge due to the resolution of a dispute, or if a finance charge has to be corrected if a payment is returned because money is not available.
9. Subprime cards rules set
People who get subprime credit cards and are charged account-opening fees that eat up their available balances get some relief under the law. These upfront fees cannot exceed 25% of the available credit limit in the first year of the card.
Such fees do not include late fees, penalties for going over your credit limit and fines on payments that are returned because of inadequate funds.
Card applicants still need to be cautious: Some issuers shifted and charge fees before accounts are opened.
10. Minimum payments disclosure
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.
11. Late fee restrictions
Late fees are capped at $29 for occasional late payments; however, the fees can go up to $40 if cardholders are late more than once in a six-month period. The Consumer Financial Protection Bureau occasionally adjusts these fees based on inflation.
When the CARD Act went into effect, late fees were restricted to $25 for an initial default, going up to $35 for additional tardy payments in a subsequent six month period.
12. Gift card expiration rules
Gift cards cannot expire sooner than five years after they are issued. Consumers should be able to easily locate the terms related to the expiry. 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. For one, it is difficult to translate regulations intended for disclosures in a pre-Internet world to today’s rapidly evolving online world. Other shortfalls include:
- 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 warning.
- False marketing relating to add-on products such as debt protection hasn’t been addressed.
- There are no adequate protections for identity theft protection add-on programs, whose terms and costs could be misrepresented.
- Rewards programs, which differ largely from one card to another, are not addressed either.
- Security of cardholder information, and unauthorized online transactions, as online card use rises is another concern.