On May 22, 2009, the Credit Card Accountability Responsibility and Disclosure Act was signed into law by President Barack Obama. You don’t have to remember that long title because it’s also known as simply the CARD Act of 2009.
The CARD Act was implemented in three stages, but a large part of the legislation went into effect on Feb. 22, 2010. Whether you’re unfamiliar with the CARD Act or just don’t know what credit used to be like, I’ll fix that for you right now.
Sometimes, you don’t appreciate the present until you look back and see how bad things were. So, let’s hop on that train of thought and see what it was like then and what it’s like now.
— What credit card issuers could do before the CARD Act.
— Consumer protections due to the Credit CARD Act of 2009.
— What the CARD Act doesn’t do.
— Why you need to know about the Credit CARD Act.
What Credit Card Issuers Could Do Before the CARD Act.
I’ve been in the credit industry for a long time, so I remember how crazy and unregulated the credit card business used to be.
Before the CARD Act, financial institutions could do the following:
Raise your interest rate at will. There were no rules about notifying you, and there didn’t even have to be a reason. And issuers could raise rates on your existing balances, not just on new purchases. This is called a “retroactive interest rate increase.”
Imagine if the economy went into a skid and it spooked your issuer. So it raised your annual percentage rate from 14% to 20%. Let’s say you had a $5,000 balance at 14%. After the rate increase, you’d have a $5,000 balance at 20%. It’s easy to see how retroactive interest rate increases could lead to a debt disaster.
Charge unfair fees. There were over-the-limit fees, which occurred because the issuer allowed cardholders to exceed their limits but then charged those cardholders a fee for doing so. This is like telling your teenager she can stay out as long as she likes but then punishing her for missing her curfew.
There were also no guidelines for late fees or for “fee harvesting” cards (cards that charge costly fees). Sometimes, you didn’t know a fee existed until it showed up on your statement.
Make the fine print impossible to understand. I know what you’re thinking. It’s still hard to understand. But, trust me, back then, it was hard to figure out what the fees and rates were. And even the websites were often unclear.
Target young consumers. Often, issuers would set up a table on college campuses, and students were offered free gifts to sign up for credit cards. Want free pizza? Sign right here for your new credit card!
These students would have no idea of what they were getting into. There were also no income requirements that issuers had to abide by.
Now let’s take a look at what the CARD Act actually did for consumers.
[Read: Best Student Credit Cards.]
Consumer Protections Due to the Credit CARD Act of 2009.
There’s still room for improvement, but thanks to the CARD Act, financial institutions have to follow these rules:
No sudden (or arbitrary) interest rate changes. During the first year, issuers can’t change your APR unless certain conditions are met — for example, if you have a 60-day delinquency on your account or if there’s a change in the prime rate and you have a variable APR.
If your rate is increasing, issuers must notify you at least 45 days before the rate changes. And retroactive rate increases on existing balances are not allowed unless the cardholder meets certain conditions, such as being 60 days late on a payment. Are you sensing a trend about late payments? It’s really important to pay your bills on time.
No more unfair fees. Issuers are required to ask you to opt in if you want to be able to exceed your credit limit. This will still trigger an over-the-limit fee. But at least you’ll know this will happen if you opt in. By the way, don’t opt in. Giving yourself permission to exceed your credit limit is a one-way ticket to debt (and a low credit score, too).
There are also limits on late fees and, thank goodness, on the fee harvester cards. The issuers of the latter, which target subprime consumers, now have a requirement that the upfront fees, such as annual fees and application fees, can’t exceed 25% of the credit card’s initial credit limit in the first year. This is important because some of these cards have APRs around 36%.
Offer better lead time for grace periods. The issuer has to mail (or send electronically) your statement at least 21 days before the due date. This gives you time to schedule your payment before the due date. There are also restrictions on payment issues, such as when the due date lands on a weekend or a holiday. If the consumer pays the next business day, then it can’t be considered a late payment.
Create more transparent disclosures. Have you noticed that your statement has a warning about what happens if you only make the minimum payment? You get to see how long it will take to pay off your balance that way.
There’s also a section on your statement that shows how much you need to be paying per month in order to pay off your debt in three years, including how much interest you’d pay. Note that this information assumes you won’t make any new purchases with the card until your balance is paid off.
Issuers are also required to have the cardholder agreements available to review on the credit card’s website. Sometimes, you still have to really look hard for the rates and fees, but at least they’re actually there. Clearly, work still needs to be done in this area, but it’s so much better than it was before the CARD Act.
Stay within the guidelines for young consumers. One of the best things about the CARD Act is the protection offered to young adults. If you’re younger than 21, you must be able to show you have sufficient income to repay your debts in order to get a credit card.
Also, if you’re not yet 21, you need the signature of a parent or legal guardian to be issued a credit card. Warning: For the co-signer, this means joint liability. And the issuers are not allowed to offer gifts for signing up for a credit card.
What the CARD Act Doesn’t Do.
While the CARD Act addresses grace periods, it doesn’t actually require that an issuer offer you a grace period at all. It only requires the 21-day lead time if the issuer offers a grace period. So be sure you confirm that there’s a grace period when you research new cards. The lack of a grace period is still unlikely, but it does sometimes pop up in the subprime credit card market.
The CARD Act also doesn’t offer consumer protections to small business credit cards. So if you use these cards, be sure you pay attention to all emails, text messages and even snail mail from your issuer. Don’t be surprised by rate increases or changes to the terms of your credit card.
Some major banks extend the CARD Act protections to customers with business credit cards. But it’s still important to stay on top of things since the banks don’t have a legal requirement to offer CARD Act consumer protections on business credit cards.
Also, keep in mind that the Credit CARD Act of 2009 doesn’t put limits on how high interest rates can go. Rate limitations are determined by usury laws specific to each state.
Why You Need to Know About the Credit CARD Act.
OK, things aren’t perfect, but think about how much better your credit life is now because of the CARD Act. The act also set up new guidelines for gift cards and prepaid cards, which were needed. And there are rules about universal default, double billing, allocation of payments that exceed the minimum payment when you have multiple APRs with one credit card, and so much more.
The CARD Act gave you a lot of consumer protections. If your issuer breaks one of the rules, stand up and say something. If you aren’t making any progress after pointing out the illegal behavior with your issuer, then contact the Consumer Financial Protection Bureau and file a complaint. And stick with it until the issue is resolved.
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