On May 22, 2009, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009 into law. Some of the new laws became effective that day, but many of the major changes did not take effect until February 22, 2010.
The Credit CARD Act of 2009 (also referred to as the CARD Act) was created to protect consumers from questionable practices by banks and credit card issuers. Prior to the CARD Act, for instance, credit card issuers were free to raise interest rates on short notice. They could also apply a higher penalty rate to your entire balance.
These are just two examples that showed a dire need for consumer protections back then. Before the CARD Act was enacted, you might say the credit card world was a bit like the wild west. Not a lot of rules in place!
Let's take a look at some of the benefits consumers now enjoy.
1. Advance Notification of Rate Increases
Before the CARD Act, credit card companies were able to raise credit card interest rates (a.k.a., APRs) and only give you a 15-day notice. The CARD Act changed that. Now, the issuers have to give a 45-days notice before your APR (or any major change to the terms) goes up.
And, during the first year that you have your account, they can't raise your APR unless a certain set of circumstances are present. Here are the exceptions: the expiration of a promotional rate (the rate has to last for at least six months), termination or completion of a workout plan, a change in the index rate (usually the prime rate), or a 60-day delinquency.
2. Limits on Retroactive APR Increases
Here's another benefit that impacts your outstanding balance. Another provision of the Credit CARD Act of 2009 prevents issuers from raising your rates and then applying them retroactively to an outstanding balance unless certain conditions are met. It's hard to believe this was ever routine, isn't it?
If you get a rate increase, it will be on purchases going forward and you'll get a 45-days notice. But there are circumstances where this is allowed. Here are the exceptions: the expiration of a promotional rate (an intro rate has to last for at least six months), termination or completion of a workout plan, a change in the index rate (usually the prime rate), or a 60-day delinquency. Notice that the 60-day delinquency has popped up again as an exception? Pay your bill on time so can enjoy this consumer protection.
If you do trigger a penalty rate (and these can be as high as 29.99 percent), the issuer must review your account after you have six months of consecutive on-time payments.
3. Consequences of Making Minimum Payments
The credit card statement you receive today has a table that shows how long it will take you to pay off your balance if you only make the minimum monthly payment. The statement also now shows what you need to pay per month to pay off your debt in three years. This was designed to show people how long it can take to get out of debt if you only make minimum payments. And also, how much interest you end up paying. Most consumers don't realize how quickly compound interest adds up.
4. Added Time to Pay Your Bill
If the issuer offers a grace period, then the statement must be mailed or delivered to the consumer no later than 21 days before the due date. This gives you time to pay your bill during the grace period and avoid interest.
5. No More Universal Default
You might not know what this means unless you've been a victim of it. Before the CARD Act, if you made a late payment to, for example, your car lender, then you might see a change in the APR for your credit card, even if you never paid your credit card company late! This was a well-needed consumer protection.
6. Restrictions on Subprime Credit Cards and Up-front Fees
If you have bad credit, you have to be careful when choosing a credit card. There were subprime lenders charging high application fees (and more) to those who have bad credit. Under the Card Act, the subprime lenders can't charge up-front fees that exceed 25 percent of the cardholder's available credit.
7. Ban on Double-cycle Billing
This means that issuers can't go back to the previous billing cycle and calculate interest charges. Credit card issuers had been using the average daily balance of the current cycle as well as the average daily balance of the previous billing cycle. Doing this adds much more interest to a consumer's balance.
8. Limits on Fees
Prior to the CARD Act, consumers who went over their credit limit got an over-the-limit fee. The legislation states that over-the-limit fees aren't allowed unless you've "opted in" to go over the limit. It's kind of like accepting overdraft protection on your checking account although you know you will have to pay a fee.
If you do "opt in," it means you want permission to go over your limit while you're out shopping. But you'll be charged a late fee. Or you can decide not to opt in and if you go over your limit, your card will be declined. The CARD Act makes sure you have this choice and that the fee is reasonable.
As for late fees, payments that are received by the due date (or the next business day if the due date is, say, a Sunday) cannot result in a late fee. And issuers can't charge more than one late fee per billing cycle.
9. Safeguards for Young Adults
If you're under 21, you must show that you have enough income to pay your debts. If not, you may be required to get a cosigner. This is to protect young people so they don't get into debt.
There are also rules that prohibit the issuers from being within 1,000 feet from college campuses. Before the legislation, issuers would set up tables on campus and woo students with free pizza and T-shirts in exchange for signing up for a credit card. That's not allowed now.
10. Proper Allocation of Payments
If you have a balance, you could have two or more different rates involved. For instance, you might have a cash advance amount with a 25 percent APR. On the same card, you might have a $1,000 balance that has a 12 percent APR.
The CARD Act states that if you make more than the minimum payment, then the excess is applied to the balance with the highest APR. In the example above, if you made your minimum payment and added $100 to that, the extra $100 must be used to lower the balance of the amount accruing at 25 percent.
Business Credit Cards Aren't Covered
The Credit CARD Act of 2009 only covers consumer credit cards. When the CARD Act became effective, there were conversations about how to include business cards. But years have gone by and they still aren't covered. So keep that in mind if you use a business credit card. Read any and all communication you get from your issuers in case there have been changes. And do be careful if you carry a balance, because you aren't protected from retroactive rate increases, among many other things.
The bill itself is loaded with consumer protections, and if you'd like to read it to learn more, you can read it on the Congress.gov website.