This past May, President Obama signed into law the Credit Card Accountability Responsibility and Disclosure Act, otherwise known as the CARD Act. This federal law aims to protect consumers from unfair credit card company policies and help consumers better manage their spending and credit.
The first provisions of the law went into effect on August 22, 2009. These provisions include that:
- Credit card companies are required to send out a notice to consumers of any changes in the interest rates or other terms and conditions of the credit card agreement a minimum of 45 days before the change becomes effective
- Credit card companies must mail credit card statements to consumers a minimum of 21 days before the payment is due and cannot make payments due on different days of the month, on weekends or during the middle of the day
These changes are relatively minor in comparison to the changes that take effect in February 2010. Some of the more major 2010 changes include:
Plain sight and plain language disclosures
The credit card companies must use plain language in their disclosure statements and make them readily available to consumers. This includes both before and after a consumer applies for and receives a credit card. The disclosures must be available online where they can be viewed by anyone, including consumer advocacy groups.
Monthly statements must provide consumers with specific information, detailing any interest or fees paid on the account and explaining why fees or other penalties have been assessed. The statements must show credit card holders how long it will take them to pay off their current balance if they only make the minimum payment each month, including the total amount they will pay in interest. The statements must also detail the amount the credit card holder would have to pay in order to resolve the balance in 36 months.
Payments must be applied to highest interest rate balance
A credit card holder may have more than one interest rate on a card. For example, there is usually a base interest rate for purchases, but a higher interest rate for cash advances. When a consumer makes a payment on the account, the credit card company often applies the payment to the lower interest rate balance first. Under the CARD Act, this practice is no longer allowed; after interest has been deducted, credit card companies must apply the payment to the highest interest rate balance first.
No more unfair rate hikes
Not only do credit card companies have to provide notice before increasing interest rates, but they also are restricted on when they can raise rates. While credit card companies still can raise interest rates when a consumer’s credit score takes a hit from a completely unrelated account, the increased rate only can apply to the consumer’s new balance and not apply retroactively to their old balance.
For example, if Bill is 30 days late on his car payment, his credit card company can raise the interest rate on his credit card as a result, but only on any balance that occurs after the date of the interest rate increase.
However, if a consumer is 60 days or more delinquent on their credit card payments, then the credit card company can raise the rates retroactively to apply to the entire card’s balance.
Over-the-limit fees are optional
Over-the-limit fees are one of the most hated credit card fees. Rather than cut off a consumer who has reached the maximum limit on their card, credit card companies may allow the consumer to keep using the card, but charge a fee for each purchase over the limit. The CARD Act only permits credit card companies to charge consumers over-the-limit fees if they agree to “opt-in” to the policy. Otherwise, the companies cannot authorize transactions that will put the customer over the card limit.
Co-signers required for young people
In an effort to prevent college students and other young adults from opening up credit accounts and using them irresponsibly, the new law will require anyone under 21 to have a co-signer to apply for a credit card. Those who can prove employment and the ability to pay may be able to opt out of the co-signer requirement. Universities are also required to disclose any marketing or other agreements they have with credit card companies that target college students.
Credit Card Companies Do Not Welcome the New Regulations
Not surprisingly, credit card companies have not responded positively to the CARD Act. They have warned Congress that these new laws will require them to increase interest rates and fees so that they can remain profitable and to limit the credit they extend.
Consumer groups have been wary of the effect the new law will have on consumers before the Act goes into effect. There has been concern that credit card companies will use the time to hike up interest rates and fees and take other steps that will harm consumers before the Act officially becomes law.
In fact, such a result has come to pass for consumers holding certain credit cards. The Washington Post and other newspapers have reported on the interest rate hikes that took place before the first part of the legislation went into effect in August. Other companies have rolled back their rewards programs and increased the amount of late payment fees.
Regardless of these concerns, supporters of the CARD Act believe these changes are necessary to provide transparency for credit card company practices and to help consumers better manage their credit and spending habits. It will take some time to see whether these changes will achieve this goal.