CARD Act: Credit Card Accountability, Responsibility and Dislosure Act

On May 22, 2009, President Barack Obama signed a new law that would protect consumers against predatory practices from credit card companies.  The Credit Card Accountability Responsibility and Disclosure Act of 2009, better known as the CARD Act, addresses the following:

Advance notice of significant credit card term changes

Lenders can’t raise rates on existing balances

No more universal default

Payments apply to highest interest rate balances first

No finance charges on previous billing cycles

Payments must be credited on their due date

Limits on over-limit fees

No fees based on payment method

Limits on fees for subprime credit cards

Billing statements must be mailed in a timely manner

Rules on gift cards

Credit cards for young adults

Disclosure of marketing agreements with colleges

Free credit report ads

Billing statement disclosures

Online agreements

Settle estates in a timely manner

Consider cardholder’s ability to repay

Credit card issuer penalty for violating the law

Credit CARD studies

Guns allowed in national parks and refuges

Most of the credit card rules go into effect on February 22, 2010, but some rules become effective on August 20, 2009. We’ve noted which rules have already gone into effect.

Advance notice of significant credit card term changes

The new law requires credit card issuers to give sufficient notice of significant changes to your credit card terms. Credit card issuers now have to give at least 45 days advance notice before making changes to your account.

While there are not specific rules on what counts as a "significant change," we do know that interest rate increases falls in this category. That means card issuers must notify you 45 days before your interest rate increase goes into effect.

You have the right to reject the new credit card terms and close your credit card. Credit card companies can’t take certain actions against you simply because you want to avoid the changes. They can’t:

• Charge a fee because you closed your account,
• Default your account because you closed it with a balance, or
• Demand you pay the balance in full immediately.

If your rate increases and you decide to opt-out of the changes, the lender can do one of three things:

• Double your monthly payment,
• Put you on a five-year repayment plan, or
• Leave your repayment plan as it was when you opted-out.

An opt-out notice must be included with the 45-day advance notice of change in terms. The notice must include a toll-free number that you can call to opt-out along with the opt-out deadline. Note: cardholders who are 60 days late on their credit card payments aren’t allowed to opt-out of interest rate increases.

To prevent credit cardholders from shopping sprees in advance of the new interest rate, card issuers can start charging the higher interest rate 14 days after the notice of change in terms is mailed. Only transactions processed after 14 days will receive the newer interest rate.

The Federal Reserve Board has decided that opt-out rules don’t apply to minimum payment increases, because the increase is actually good for cardholders. An increased minimum payment may put a hardship on your wallet, but it allows you to pay off your credit card balance in less time and at a lower cost. There is no advance notice requirement for minimum payment increases.

This part of the CARD Act went into effect on August 20, 2009.

Lenders can’t raise rates on existing balances

Credit card issuers can’t raise interest rates within the first year of your credit card activation and they are no longer allowed to raise the interest rate on your existing credit card balance unless:

• You had a promotional rate and were told upfront when the rate would expire and what the new rate would be when the promotional rate expired. The new law requires promotional rates to last at least six months.
• You have a variable interest rate that changes with an underlying rate. Variable rates are tied to an index rate like the prime rate and can go up if the index rate goes up.
• You were sixty days late on your credit card payment. If your interest rate is increased because of late payment, your card issuer has to give you a chance to go back to your old rate if you make the minimum payment on time for six months.
• You were on a hardship plan that ended, was completed, or you dropped out of the plan.

No more universal default

The new law bans the universal default practice of raising a cardholder’s interest rate because of their payment history on another, unrelated account.

Payments apply to highest interest rate balances first

When a credit card has multiple balances each with different interest rates, any payment above the minimum should be allocated to the highest interest rate debt first, followed by the debt with the next highest interest rate.

If the credit card has a deferred-interest period, like a 0% interest for six months deal, the entire payment in the last two months of the period should be allocated to the balance with deferred interest. This lets the cardholder pay off the deferred-interest purchase without having to repay any other non-promotional balances first.

No finance charges on previous billing cycles

The double-billing cycle method of calculating finance charges is banned. Banks are not allowed to impose finance charges on balances from previous billing cycles unless there is an adjustment to the previous balance or the payment for the previous balance was returned.

Payments must be credited on their due date

Payment due dates must fall on the same day every month. If a payment is received by 5 p.m. on the due date, it must be credited that day. If a due date is on the weekend, holiday, or other day when the creditor doesn’t receive or accept payments by mail, then the payment must be credited on the next business day without a late penalty.

If you make a payment at a local branch, it must be credited to your account the same day.

Credit card issuers can’t charge a late fee within 60 days of changing its mailing address or payment processing procedure if the changes result in a delay in processing customer payments.

Limits on over-limit fees

Credit card issuers can’t charge over-limit fees unless the consumer has been given the opportunity to opt-in to the fee. Otherwise, any transaction that attempts to exceed the credit limit should be rejected. If a cardholder opts-in to over-limit fees, the amount of the fee must be disclosed. Cardholders should also be given the option to opt-out of the fees at any time.

Card issuers can only charge one over-limit fee to an account in a billing cycle. An over-limit fee can only be charged once in each of the next two billing cycles unless the cardholder receives a credit limit increase and exceeds the new credit limit or pays the balance below the credit limit and exceeds it again.

No fees based on payment method

Creditors can’t charge cardholders a fee to make a credit card payment, regardless of whether the payment is made by mail, telephone, electronic transfer, or any other method. There’s an exception: a fee can be charged when the cardholder requests an expedited payment. For example, you might ask your payment to be promptly on your due date to avoid a late fee.

Limits on fees for subprime credit cards

Subprime credit cards are commonly known as "fee harvester cards" and are targeted at consumers who have trouble getting credit. These cards often charge upfront fees which in the past have consumed much of the credit limit. The new law limits these fees. The upfront fees on subprime credit cards can’t consume more than 25% of the available credit. That rule excludes any over-limit fees, late fees, or returned check fees. For example, on a credit card with a $400 credit limit, the initial fees can’t be more than $100. If a payment is late, a $25 late fee can be assessed even though $100 in upfront fees have already been charged.

Billing statements must be mailed in a timely manner

Cardholders must be given enough time to make their credit card payments. Billing statements should be mailed or delivered at least 21 days before the minimum payment is due. On accounts with a grace period, the cardholder must receive the billing statement at least 21 days before the finance charges would be imposed on the balance. This part of the CARD Act became effective on August 20, 2009.

Rules on gift cards

Gift cards, gift certificates, and prepaid cards will not expire within five years unless the expiration has been previously disclosed. Issuers cannot charge dormancy fees, inactivity fees, or service fees on gift cards within a 12-month period. All fees are limited to one per month and must be disclosed before the gift card is purchased.

Credit cards for young adults

People under 21 cannot receive a credit card unless they have an adult co-signer who is over 21 or can prove they have sufficient income to repay the balance. Additionally, credit card issuers cannot send pre-approved credit card offers to consumers under 21.

Credit card issuers must have agreement from the adult co-signer before increasing the credit limit on a credit card held jointly with a cardholder under 21.

Card issuers aren’t allowed to give away free products in exchange for having students sign up for a credit card on or near campus or at an event sponsored by the college.

Disclosure of marketing agreements with colleges

Credit card companies are required to disclose any promotional agreements they have with colleges and alumni organizations. Colleges and alumni organizations also have to disclose any agreements with credit card companies that allow the companies to access student and alumni contact information. Any payments made by credit card companies to schools must be shared with the Federal Reserve Board.

Free credit report ads

Any company advertising a free credit report, must include a statement letting consumers know they are entitled by law to receive a free credit report from each of the credit bureaus each year. The advertisement must state that the only official website for getting a government-granted free credit report is annualcreditreport.com. Ads on the radio and television should include the following statement both in audio and video: "This is not the free credit report provided for by federal law."

Billing statement disclosures

Billing statements must include the date by which the payment must be received to avoid a late payment. The statement must also list the date on which a late fee will be charged to the account if minimum payment is not received on time. Credit card issuers must place a disclosure notice near the due date stating the number of missed payments that will cause the interest rate to increase and the amount of the penalty interest rate.

Credit card statements must include a statement letting cardholders know that making minimum-only payments increases the time and cost of paying off a debt. Billing statements must let cardholders know how long it will take to repay their balance if they make minimum-only payments. The statement should also list the amount of interest consumers will pay if they make the minimum payment. Finally, statements must include the monthly payment required to pay off a credit card balance in 36 months.

Credit card issuers have to set up toll-free numbers that will allow consumers to get information about non-profit credit counseling and debt management assistance and include this information on billing statements.

Online agreements

Credit card issuers are required to post credit card agreements online. The Federal Reserve will maintain a public internet site that contains all the credit card agreements.

Settle estates in a timely manner

The Federal Reserve Board will establish procedures for credit card issuers to handle estate issues. Credit card issuers are required to work with estate administrators to settle the unpaid credit card debt of a deceased person in a timely manner.

Consider cardholder’s ability to repay

Credit card issuers cannot open new credit card accounts or increase credit limits without assessing the borrower’s ability to make credit card payments.

Credit card issuer penalty for violating the law

Any card issuer who violates the Credit CARD Act can be fined between $500 and $5,000 each time it violates the law.

Credit CARD studies

With the new law, Congress requires several federal agencies to do studies and reports for credit card related issues.

• The Comptroller of the Currency will look at credit card insurance to determine whether the product is predatory and should be offered to certain cardholders.
• Several federal agencies are required to provide a report detailing the financial and economic literacy programs available for children and adults. The agencies should make recommendations about funding for additional programs and a plan to promote financial education.
• The Federal Reserve Board will look to see whether the CARD Act has impacted the credit card market and the financial health of consumers. The first report is due May 22, 2011 and every two years following.
• The Federal Reserve Board, Federal Trade Commission, and other agencies will look at whether credit card issuers use purchase information to increase interest rates or lower credit limits.
• The Comptroller General of the United States will look at merchant credit card fees to determine whether these fees are disclosed to consumers, how the fees affect merchants’ ability to negotiate with banks, and whether merchants can give discounts to customers who pay with cash.
• The Federal Reserve Board will give a report on the terms of small business credit cards given to businesses with 50 or fewer workers. The Credit CARD Act doesn’t current cover small business credit cards but the report will help determine whether rules are needed.
• The Small Business Administration will set up a task force to decide what small businesses should do to protect credit card data. The task force will recommend a website that contains information to help small business owners protect credit card data.
• The Secretary of the Treasury must look at stored value credit cards and determine what rules should be put in place to prevent money-laundering into and out of the United States.
• The Federal Trade Commission should research an ATM warning system that would possibly include an emergency PIN to alert the police of potential danger.

Guns allowed in national parks and refuges

Completely unrelated to credit cards, the Credit CARD Act includes a law that allows visitors in U.S. National Parks and refuges to carry licensed firearms in the parks, if state law allows it. The rule made it into the legislation during the first round of voting and was left so the rules would not be delayed.

The full text of the Credit CARD Act is available at govtrack.com.