Credit CARD Act Of 2009
The Credit CARD (Card Accountability Responsibility And Disclosure) Act was signed into law on May the 22nd, 2009 and became effective on February 22, 2010. The aim of the Act was to reduce deceptive practices of credit card issuers which were costing consumers billions a year in hidden and unreasonable fees.
Fees, Charges & Interest
There were a number of changes to the way fees were handled and limits on the maximum fees that can be charged.
- Annual/application fees can be no more than 25% of the credit limit offered.
- Increased overdraft protection. Consumers must now opt in to having overdraft on their credit accounts. If a purchase is made that purchases an individual over their credit limit they will now be denied for the purchase rather than it being accepted and then charged a high overdraft fee. Card holders can opt to still go over their credit limit, but they must do so in writing and can revoke this decision at any time. If they do go over their credit limit they may only be charged once per billing cycle.
- Payments made must be applied to balances with the highest rate of interest. E.g if a person has an introductory rate of 0% on balance transfers and makes a transfer of $5,000 and then makes purchase of $500, when payment is made it must be paid towards the purchases of $500 as they have a higher rate of interest.
- No interest rate increases for the first year. Unless:
- The interest rate is tied to an index that goes up. Over 60% of cards fall into this category.
- If there is an introductory rate. This must be offered for at least six months and then the card can revert to the go to rate advertised.
- If an individual is more than 60 days late in their payment.
- If an individual is on a payment plan and their don’t make their monthly payments as discussed.
- Increased rates for new purchases only. If a creditor does increase an individuals interest rate, it only applies to new purchase they make. For example, consumer A purchases $500 in new clothes. His card issuer decides to increase his interest rate by 5% from 15% making it 20%. Consumer A then makes another $500 in purchases. Consumer A will be charged 15% interest on his first purchase and 20% of his second purchase as the second purchase was made after the rate increase.
- No fees for different payment methods. Card issuers can no longer charge extra to pay by phone or online.
A number of changes to how notifications are handled were also made. They are as follows:
- Account statements must be sent out 21 days from when payment is due (up from 14 days pre CARD act).
- Due date must be the same each month. E.g if you get your first bill on the 15th of January, your next bill should be the 15th of February and so on.
- Cut off time must be no earlier than 5PM on the due date.
- If the due date falls on a public holiday or weekend it must be extended to the next working day.
- Must state how long it will take to pay off the current balance. It must included how long it’ll take if the minimum monthly payment is made along with how much it’ll cost monthly to pay off the balance in 3 years.
- 45 days written notice must be given before the credit card issuer can:
- Increase a consumers interest rate
- Change certain fees (e.g annual fees, late fees, cash advance fees, etc)
- Make any other significant changes to a consumers credit card account
- Issuers must also include that consumers have the right to cancel their account before these account changes take effect and that this can increase their monthly payments.
The act made a number of changes to how consumers under the age of 21 can be marketed to, along with certain requirements for them to be approved for credit cards.
- To be approved they must have one of the following:
- Proof of income (e.g pay stub or tax return) that is sufficient to pay off any credit debt incurred.
- A co-signer over the age of 21
- Certain marketing tactics were disallowed marketing:
- No pre-screened offers unless the consumer opts in with the three consumer reporting agencies (Equifax, TransUnion & Experian)
- Card issuers cannot offer tangible gifts to students as an incentive to apply for credit cards.
They also added that the credit limit on an account with a co-signer cannot be increased without the co-signers written approval.
The CARD act also implemented a few changes to bank issued gift cards (also known as preloaded debit cards), these changes do not apply to store specific cards like a Walmart gift card though.
- Expiration date must be clearly labelled on the front of the card
- Expiration date must be at least five years from purchase date
- Monthly use or non-use fees cannot be charged until the card has been inactive for a period of one year.
There was an amendment made to the Act which didn’t have anything to do with credit. Pro-gun supporters added an amendment which prevents the Secretary of Interior from enforcing regulations that prevent individuals from possessing firearms in national parks.
Was The Act Effective?
Many political commentators and economists believed that the CARD act wouldn’t be effective as card issuers would simply raise other fees to make up for the ones that this act regulated against.
New York University’s Stern School Of Business produced a report that showed Americans are receiving savings of $20.8 billion per year (2.8% of the average daily balance) due to the CARD act with those with bad credit being particularly well served by this act.
They also have a hypothesis for why banks simply didn’t raise other fees to make up for this shortfall. Consumers primarily shop for credit cards on three factors: annual interest rates, sign up bonuses and any annual fee. Because the CARD act only disallowed