Credit Card Laws and the CARD Act of 2009

Published: 11/22/2011

The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 is a piece of reform legislation that brought about sweeping regulation in the way credit card businesses were run in the US. GetDebit deconstructs the provisions of this act, and tells you exactly what it means for you.

The Credit CARD Act of 2009 was passed in response to the general bad press that the credit card industry had been getting, on account of practices that were at best opaque and at worst predatory (I can’t help but think of those CapitalOne Visigoths). This was also a measure to respond to the rising debt of US citizens, which assumed much more pressing dimensions in 2009, during the heat of the recession.

Overall, this act has meant more security to cardholders and less profit for credit card issuers (although personally let’s not count those guys out yet). Below we cover some of the more important aspects of this legislation, translating the legalese of the Act into plain English.

Specifically, we’ll cover:

Protection against interest rate hikes

A major pain point for many cardholders has been that they wake up one fine day and suddenly realize their card’s rates have gone up without any sort of prior notice from their provider. The Credit CARD act protects cardholders from abrupt rate hikes.

If a card issuer has to increase the APR, fees and finance charges on a card, he needs to give the holder a prior notice of at least 45 days, in writing. If the cardholder isn’t okay with the revised terms, he can cancel his card without being subject to fines or penalties – in this case the due amount will be payable with an amortization period of at least 5 years. The option to cancel is crucial, as it will surely make card issuers think twice before hitting consumers with rate increases (for fear of losing customers).

Yet, this provision makes sure that issuers have the option of increasing rates if there are justified circumstances. For instance, if minimum payment isn’t received for 60 days after the due date, issuers can increase rates. But here again, if minimum payments are made for six months, the rate reverts to the original rate.

This section of the Act also prevents the dreaded “universal default” rate increase. Universal default allowed lenders to reset a cardholder’s interest rate from the normal APR to the default APR if the lender discovered that the cardholder had defaulted on any other loan (whether it was held with that institution or not). Needless to say, it was a rather “unpopular” clause with the rank-and-file consumer. Roughly half of US banks have universal default language in their terms and conditions, although it is loosely enforced.

Protections for sub-prime customers

Many cards are targeted to subprime customers-those who have high credit risk. The act defines subprime cards as those in which annual and other fees exceed 25% of the credit limit.

The act protects subprime cardholders by stipulating that the annual fees not be paid out of credit made available in the account, but rather requires that these fees be paid up-front before the card is issued to the consumer. This in effect prevents users from “getting in over their heads”, since if they can’t afford the annual fees, they won’t be able to get the card in the first place.

Protections for young customers

The act also takes a step to protect another vulnerable constituency – young cardholders. The act stipulates that credit cards not be handed to people under 21 years of age without a co-signor above 21 years of age.

It also takes a step towards tackling one cause of proliferation of young cardholders – sponsorship by educational institutions. The act stipulates that any college or university make a disclosure if it’s permitting marketing of credit cards. If it is allowing such marketing, the issuers cannot make any inducements available to students. Now, if only we can do something about all that underage drinking;)

The death of double-cycle billing (good riddance!)

The act prohibits the double cycle billing, historically one of card issuers’ many tricks to extract maximum value from their flock of cardholders. Essentially the double cycle billing allows card issuers to bill finance charges on average balances for the last billing cycle and the current billing cycle – which can increase the amounts payable substantially. Here’s an example of how double billing typically works:

Why Double Cycle Billing Lines the Pockets of Credit Card Issuers
Balance at start of month 1 $1,000
Amount paid at end of month 1 $500
Average balance for month 1 $1,000
Balance at start of month 2 $500
Amount paid at end of month 2 $500
Average balance for month 2 $500
Balance at end of month 2 $0
Average balance over 2 months $750

With double cycle billing, you pay interest over your average balance for 2 months – that is, $750 (per the above example). With single-cycle billing, you would have paid interest for just your second month’s balance, which is only $500. That really can add up over time!

The Credit CARD act thus prohibits double cycle billing, saving cardholders substantial amounts of money. In addition, it also prohibits billing of cardholders on any portions of balances repaid during holders’ current billing period.

Reigning in over-the-limit fees

Another pain point for many customers is the over-the-limit transaction fee that can be steeper than the French Alps (as an aside, I hear Chamonix is a great place to party it up-it’s on my hit list!). The Credit CARD act stipulates that issuers can’t levy over-the-limit transaction fees if customers haven’t agreed beforehand (imagine that: “I agree to get hit with fees!”). So if you haven’t opted into an over-the-limit transaction fee and you make a transaction that could send your balance over the limit, your transaction will be declined, but you’ll not be charged such an egregious over-the-limit fee. This essentially means customers have the option of setting a hard credit limit that cannot be exceeded in any circumstances.

You know, before researching this article, I had no idea about this option. I’m going to call up my card issuers and ask that I have a hard credit limit that can’t be exceeded. I hate card fees-it defeats the whole purpose of rewards!

Another Sneaky Trick Unmasked: How Payments Are Applied to Balances

Man, the CARD Act really does unmask a lot of the sneaky tricks that card issuers use to extract maximum value from their “clients” (more like: cattle). And this is one of the sneakiest. It used to be that when you made a payment on your card, the bank would apply that payment to the lowest APR balance on the card. Only once you paid that down fully could you begin to attack the higher APR balances (which were in essence “protected” by the lower APR balances). So if you had made the tactical mistake of doing a 0% APR balance transfer, but then continued to use that card to make daily purchases, you might find yourself paying down the 0% loan first, while getting slammed all the while with high interest charges on the purchases you made.

The CARD Act now requires that all payments above the minimum payment be applied to highest APR balances first (sweet!). If you only make the minimum payment, they can still apply that to the lower APR balance, so if you are carrying a higher APR balance, make sure to make larger pay-downs.

Get Smart: Repayment Information

The act also stipulates that card statements contain information about repayment. It should disclose, for instance, how long it’d take for a consumer to repay if he pays the minimum payment amount. It should also disclose how much the net cost to consumer will be if he chooses to pay minimum payment every month. In short, the act ensures that card issuers help educate customers about fiscal responsibility – and make clear the consequences they are opting in to. PS: 99 is smokin’.

Wrapping Up Our Analysis of the CARD Act of 2009

In summary, the Credit CARD act takes much needed steps, especially given that customers have been increasingly vulnerable to card issuers’ tactics. Some of the situations the act deals with are those where cardholders should have watched out for themselves, but perhaps were not financially savvy enough to have caught. Some others are cases where card companies have been deliberately misleading.

The only negative is that the act doesn’t apply to credit cards issued before the Act was passed. But all in all, it’s a much needed regulation to protect cardholders, especially those who aren’t into reading and interpreting the fine-print.

And, just to end on a dark note, even as we speak I am sure there are armies of analysts at the big issuers devising clever work-arounds to the CARD Act, while dozens of high-paid credit card lobbyists are sipping wine, eating steak (a la Matrix) and watching strippers while they discuss the “drawbacks” of the CARD act with their congressional counterparts. It’s economic warfare out there folks, let’s not be fooled. Don’t expect this Act to replace our own financial smarts. Keep on GetDebiting.

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