Significance of The 2009 CARD Act
Legislation that Changed the Way Credit Card Companies Deal with Consumers
Prior to 2009, even the best consumers could end up paying high fees on credit cards. You might sign up for a card with no annual fee and a low interest rate, only to be hit with late fees and a change to a higher interest rate within months. Deceptive practices and aggressive marketing gave credit card companies the authority to do pretty much anything they wanted, whenever they wanted.
A few common practices included having the payment cut off in the middle of the day, meaning if you paid the bill at 5 pm on the due date you could still be hit with a late fee. If you were late on your payment by a few hours, the company could raise your rates to the default interest rate permanently. Banks would frequently change due dates, retroactively raise interest rates on existing balances, and often only gave consumers 14 days from the bill print date to make a payment.
Since the Credit Card Accountability and Disclosure Act or CARD Act has been in place, studies have estimated that consumers are saving around over 12 billion dollars a year in reduced interest and fees.
There are 10 key provisions in the Act that have significantly impacted consumers. These include the following:
- Protection against fees. The Act stipulates that a bill must be due on the same day each month and cannot be arbitrarily changed. Borrowers must have at least 21 days to pay their statements from the time the bill is mailed. Bills cannot be due at odd times of the day or on weekends or holidays. A bill due on Sunday can be paid on Monday and still be considered on time. Inactivity fees were eliminated and late fees must be reasonable and cannot be more than the minimum payment due. Reasonable has been defined as $25 for the first occurrence and $35 for additional late payments within a six month period of time. Only one late fee can be assessed per billing cycle.
- Changes how interest is credited and when rates can be raised. With the implementation of The Card Act banks are no longer allowed to apply increased interest rates to existing balances unless the penalty rate is in effect. They can raise rates on new purchases after the borrower has been given at least 45 days’ notice. If you do not agree with the changes in terms you have the opportunity to cancel your account and continue to make payments on any remaining balance at the lower rate for up to 5 years. Promotional rates must last at least six months and the terms of the original agreement cannot be changed in the first year the card is held. Payments that are above the minimum must be credited towards the highest interest rate first.
- Elimination of over-the-limit fee. This fee generated millions in fees for banks. It was common practice to credit larger purchases first and then charge multiple over the limit fees for smaller purchases (much like banks did on checking accounts). The credit card company would approve purchases that would result in you going over your credit limit and then charge a fee for the “privilege” of going over your limit. The CARD Act effectively eliminated this fee. The new law requires cardholders to “opt-in” to over-the-limit transactions. Today a transaction that will put you over the credit limit will generally be declined.
- Restricts marketing to the under 21 market. Before The CARD Act College students could get a credit card with no income or credit. Credit card issuers were very aggressive in marketing to students because of the lifetime income potential. Today students must be able to prove they have the ability to re-pay the debt before they can be approved without a co-signer. Promotional mailings cannot be targeted to those under 21 unless they opt-in and marketing on campuses is greatly restricted. No more free T-shirts and pizza on the way to the football game, just for applying for a credit card.
- Statements are easier to read. Current statements must have clear line items for charges including late payments and interest. Statements must also include how long it will take to pay your credit card off making the minimum payment as well as a three year payoff illustration, assuming no new charges are made. Information on total interest paid in both scenarios is also included.
- Restricts fees on secured credit cards and other low balance cards. Those with poor credit or no credit use these cards to establish or re-establish credit. Before 2009 fees could eat up the entire available balance, leaving the consumer with no credit to actually use. The CARD Act restricts fees on these cards to no more than 25% of the available balance in the first year.
- Eliminates Universal Default. One of the ways credit card companies charged borrowers higher fees was through the universal default clause. This said if you were late on any bill, then everyone else could raise your rates. This meant if you got behind on your student loans all of your credit cards could charge the default rate even though you had never missed a payment with them. This provision also prevents companies from instituting the default interest rate until the account is 60 days late, and the lower rate can be restored after 6 months of on time payments.
- Regulates selling supplemental products. Add-ons like insurance were common practice prior to 2009. Many consumers did not realize they were signed up and paid high fees for minimal insurance to cover minimum payments in events such as unemployment. The CARD Act eliminated deceptive practices around selling these products. Banks also cannot charge fees for basic services like paying over the phone or internet.
- Regulates fees on gift cards. Gift card terms must be clearly stated on the packaging. There cannot be any fees during the first year and the card must be good for a minimum of 5 years. After the first year inactivity fees can be assessed once per month if it was disclosed. Gift cards are considered any pre-loaded cards that are available through limited retail outlets.
- Exception for Housewives. In 2012, there was an addendum to allow stay-at-home spouse to gain access to credit. When the CARD Act restricted access to college students requiring proof of ability to repay, this prevented stay-at-home spouses from access to credit. Now “household” income can be used rather than only “personal” income.
While the legislation is still in the early stages, it appears to have been successful in bringing more transparency and fewer deceptive acts on the part of credit card issuers. Those with poor credit and college students have more difficulty establishing or re-establishing credit, but overall, fees are down without interest rates being significantly higher. The vast majority of consumers have saved money during the 5 years since the Act has been implemented.
The Federal Consumer Financial Protection Bureau (CFPB) is dedicated to monitoring the outcome for consumers along with initiating new protections and further clarifications to increase consumer protection around financial products.