Impact of The CARD Act on Consumers

August 27, 2015

In 2009 Congress passed the Credit Card Accountability Responsibility and Disclosure Act, otherwise known as the CARD Act. In the wake of the Great Recession and the collapse of the financial markets, government regulation and changes were put in place to protect consumers and prevent another financial collapse. The goal of the Act is to curtail aggressive and deceptive practices and increase transparency as it relates to credit card activity, billing and fees.

It is sometimes referred to as the Credit Card Holders Bill of Rights. The majority of the changes went into effect by February 2010.

What The CARD Act Provisions Mean To You

1. Protection against late fees provide better consistency. One year after the act went into effect the Consumer Financial Protection Bureau (CFPB) noted that overall consumer fees were down even though banks increased the minimum payments due. Credit Card issuers may still charge a late fee if payments are even one day late, and the penalty interest rate will go into effect if the account becomes 60 days late. Once the account is caught up for six months the original rate must be re-instated, although the penalty rate can still be charged on new purchases.
2. Impact on Interest Rates means overall you should pay less in interest. If rates rise, the higher rate it will be charged for new purchases only, rather than retroactively, unless you have activated the penalty or default rate. Any payments above the minimum must go to the highest interest rate charged. Unfortunately, according to the CFPB, it is estimated that 34% of consumers only pay the minimum still leaving many struggling to pay down high interest rate debt, without much relief.
3. Elimination of over-the-limit fee resulting in significant savings for consumers. Going over the limit can still enact the default rate, if you do so consistently, but you can no longer be charged a fee provided you do not “opt-in”. This also means if you do not have enough available credit charges will be declined. Some transactions like gas purchases can still result in you going over your credit card limit. When this occurs the amount over the limit will generally be added to the minimum payment you are required to make.
4. Restricts marketing to the under 21 market making it more difficult for college students to get credit. Companies cannot entice students to sign up for a card with freebies and have restricted marketing practices around college campuses. As the way around this companies have taken to social media and now aggressively market to students with online promotions and incentives which are not covered under the act. While many students have still gained access to credit cards many students have turned to pre-paid cards and pre-paid debit cards, which are not covered under the Act and can come with high fees including transaction and monthly fees.
5. Statements that are easier to read are meant to help you see the total cost of borrowing and interest you are paying over time. This was perhaps the most noticeable change as statements have become significantly easier to read. If you have a lot of credit card debt you could stop using your card, make the three year payment schedule listed on your statement, and have the card paid off, while reducing overall interest. If you are barely able to make minimum payments, you can also see that some payoffs will take upwards of 30 years making only the minimum payments, so long as you stop using the card. This data can help you determine if you need professional help managing your debt or if you can put a plan in place to address your credit concerns.
6. Restricts fees on secured credit cards and other low balance cards which help those with poor credit have a better chance at using funds towards purchases rather than fees. As a work around, some companies are charging upfront fees before the card is issued, in order to still collect from vulnerable consumers. As with any card, the best strategy to build credit is to make a few charges each month and then pay the card off in full. This will minimize or eliminate fees and interest charges and build your credit score enabling you to obtain a standard credit card with higher available limits and lower fees.
7. Eliminates the Universal Default which benefits anyone struggling to make payments. Now you will only be hit with a higher default interest rate if you are late on that particular card by 60 days or more. However, companies can still reduce your credit line, which will also impact your credit score, if they feel your risk has gone up.
8. Regulating the selling of supplemental products has saved consumers from paying fees for services they may be unaware of and do not want or need. Credit card payment insurance typically will make your minimum payments in the event of a job loss. It might also pay off balances in the event of death or disability. The CFPB has pursued several banks and won lawsuits requiring the banks to repay millions of dollars back to consumers due to deceptive practices around signing up customers for insurance and other high margin low benefit, supplemental products.
9. Regulates fees on gift cards addressed concerns in this growing market. Today most gift cards do not come with any fees or expiration dates. This $100 billion market is increasing by an estimated 29% each year. With 1 billion in gift cards going unused each year, these regulations have helped consumers save money in fees. However, the longer you hold onto a gift card the more likely it is to get lost or the business can go out of business costing you the value of the card. The other challenge is that a card may look like a gift card but might actually be a pre-paid card which can be re-loaded. These are not covered by the CARD Act and can come with high fees.
10. Exception for housewives reverted back to the rule which allows consumers to use “household” income instead of “personal” income. This continues to allow spouses without income to gain access to credit, which can be particularly important for a spouse trapped in an abusive relationship.

The two key areas that were not addressed in the CARD Act of 2009 are pre-paid or debit cards, and small business credit cards. With more difficult access for college students, new immigrants, and those with poor or limited credit, the use of pre-paid and debit cards are a fast growing market. The CFPB was put into place to monitor and propose new legislation that can address these loopholes.

While the majority of consumers are not familiar with The CARD Act, it has been successful in providing a number of valuable protections that can decrease your cost of borrowing from credit cards and protect you against aggressive and deceptive practices from credit card issuers.