The CARD Act: What You Need to Know
Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, oneill@aesop.rutgers.edu
The Credit Card Accountability, Responsibility and Disclosure (CARD) Act was signed into law on May 22, 2009. Most of its major provisions take full effect February 22, 2010 and some prohibit or curtail formerly profitable credit card industry billing practices such as “universal default” (i.e., charging higher interest or fees on one credit card due to late payments or other infractions with another credit card). As a result, it is expected that credit card issuers will be instituting new policies and fee structures to make up for lost revenue. See the fact sheet The Aftermath of the CARD Act of 2009: Expect Changes in Your Credit Card Contract for additional information on credit card billing changes that have already taken place or may be implemented in the future.
Some industry experts have called the CARD Act the largest single reform ever imposed on the credit card industry. Its effects are far-reaching and include everything from restrictions on interest rate increases and over-the-limit fees to changed billing methods and even new rules for retail gift cards. There are also strict rules regarding the issuing of credit to young adults under age 21. Credit card applicants under age 21 must show proof of income or have a cosigner in order to be approved for a credit card. These provisions are discussed in detail in the fact sheet Credit Card Rules for Young Adults.
Below is a description of major CARD Act provisions that affect different aspects of credit card marketing and billing:
Disclosure Requirements
• Consumers must receive 45 days' notice (up from the previous requirement of 15 days) before a change in key account terms such as increased interest rates and fees. This requirement went into effect in August 2009. It does not apply to credit limit changes or interest rate caps, however.
• Credit card issuers must display on billing statements how long it would take to pay off the existing balance and the total interest cost if only required minimum payments are made. Issuers must also display the payment amount required and total interest cost to pay off the existing balance in 36 months.
• Credit card companies must provide on every statement a toll-free phone number and Internet address for cardholders to request payoff balances.
• Creditors are required to provide a 30-day advance notice of account closure.
Interest Rates
• The practice of universal default is banned. Credit card issuers cannot raise a customer’s interest rate to a penalty or default rate (often 24 to 32%) because of late payments to another creditor on an unrelated account.
• With the exception of clearly disclosed "teaser" rates or a change in the “index” (e.g., the Prime Rate) used to calculate interest on a variable interest rate credit card, initial credit card contract terms must remain stable for an entire year before any changes are made.
• So-called "teaser" rates (i.e. low initial promotional interest rates that last for a short period of time) must be in effect for at least six months.
• Interest rates on an existing balance cannot be raised unless payments are more than 60 days late or a teaser rate expires. When this happens, if a consumer pays at least the minimum balance on time for six consecutive months, the previous, lower, interest rate must be restored.
Fees
• Over-the-limit fees will be charged only if consumers give their permission for creditors to process transactions that would place the account balance over the approved maximum limit. In other words, consumers must "opt in" for an over-the-limit fee to be charged.
• There cannot be more than one over-the-limit fee on a credit card per billing cycle.
• The charging of late fees is prohibited when cardholders present proof that their payment was mailed within 7 days of the due date.
• Credit card issuers are prohibited from charging fees that are greater than 25% of a credit card’s credit limit. This had previously been a problem on some low-credit, high fee subprime credit cards.
Billing Traps
• Credit card bills must be mailed 21 days before the bill is due instead of the previous 14-day advance mailing requirement
• Late fee "traps" such as weekend due dates, shifting payment dates, and early morning deadlines are prohibited. Payment received by 5 pm on the due date will be considered on time.
• Payments that are greater than the required minimum payment must be applied, in descending order, starting with the balance with the highest interest rate.
• Two-cycle average daily balance calculations are prohibited. This means that lenders cannot use the balance from the previous month to calculate interest in the current month. Gift Card Regulations
• Requires gift cards to have at least a five-year life span (i.e., they cannot expire for the first five years after they are issued). Of course, there are no guarantees if the gift card issuer goes out of business.
• Inactivity fees cannot be assessed unless a gift card has not been used for 12 months.
While the CARD Act has made substantial strides in eliminating abusive credit card billing practice, there are still many ways that credit card customers can pay dearly for borrowed money:
• Transaction fees, such as balance transfer fees and cash advance fees, were not affected by the CARD Act and can be raised.
• Annual fees can also be raised or implemented on credit cards that previously did not charge a fee.
• Policies regarding credit card grace periods can be changed.
• Penalty annual percentage rates can be imposed.
• Credit limits and minimum payment requirements are subject to change by creditors.
When dealing with credit card companies, knowledge is power. This includes knowledge of the CARD Act and knowledge of the terms of individual credit cards. Credit cardholders should read all bill inserts and other correspondence from creditors to be aware of changes in key terms such as interest rates, required minimum payments, and fees. If there are questionable items, call the card issuer’s toll-free number and request an explanation. Try to pay monthly credit card bills in full or, at the very least, more than the minimum payment. Always pay credit card bills on time and make debt repayment a high priority financial goal. By getting out of debt as quickly as possible, your balances will be lower if there is a negative change in terms (e.g., a reduced credit limit). Avoid triggering penalty interest rates and fees. If you have credit cards with rewards programs, cash in and “use them before you lose them.” If you have credit cards that you want to keep but use infrequently, consider using them every 4 to 6 months to avoid having these accounts closed due to inactivity.
