Credit Card Reform

Important legislation was passed to rein in abusive credit card practices. The Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009 marked an important turning point for American consumers by ending the days of unfair rate hikes and hidden fees by credit card providers. For too long, credit card contracts and practices had been unfairly and deceptively complicated, often leading consumers to pay more than they reasonably expected. Every year, Americans pay around $15 billion in penalty fees and nearly 80% of American families have a credit card with 44% of families carrying a balance on their credit cards.

Basic Principles for Credit Card Reform

Changes in credit card practices were predicated on four main areas of concern:
#1 – strong and reliable protection for consumers
#2 – all the forms and statements sent out must have plain language
#3 – consumers can shop for a credit card without fear of being taken advantage of
#4 – more accountability in the system so deceptive practices can be prosecuted

Major Changes Made By the Credit CARD Act of 2009

• Banned unfair fate increases – Financial institutions can no longer raise rates unfairly and interest rates on existing balances can not be hiked.
• Banned retroactive rate increases – Stops rate increases on existing card balances due to “any time, any reason” or “universal default” and severely restricts retroactive rate increases due to late payments.
• Provided First Year protection – Contract terms must be clearly spelled out and stable for the entirety of the first year. Firms may continue to offer promotional rates with new accounts or during the life of an account, but the rates must be clearly disclosed and last at least 6 months.
• Ended Late Fee Traps – Credit Card providers must allow card holders at least 21 calendar days from time of mailing to pay the monthly bill. The act also ended late fee traps such as weekend deadlines, due dates that changed each month, and deadlines that fell in the middle of the day.
• Enforced Fair Interest Calculation – Credit card companies are required to apply excess payments to the highest interest balance first. The act also ended the confusing and unfair practice by which issuers use the balance in a previous month to calculate interest charges on the current month, called “double-cycle” billing.
• Required Opt-In to Over-Limit Fees – Consumers can avoid over-limit fees because Credit Card providers have to obtain the consumer’s permission to process transactions that would place the account over the limit.
• Restrained Unfair Sub-Prime Fees – Sub-prime, low-limit credit cards will be substantially restricted on interest rates they can charge.
• Limited Fees on Gift and Stored Value Cards – greater disclosure on fees for gift and stored value cards and restricted inactivity fees unless the card has been inactive for at least 12 months.
• Plain Sight / Plain Language Disclosure – Credit card contract terms must be disclosed in language consumers can see and understand so they can avoid unnecessary costs and better manage finances.
• Real Information about Financial Consequences of Decisions – Credit Card issuers are required to show the consequences to consumers of their credit decisions. Issuers must display on statements how long it will take to pay off the existing balance and clearly show the total interest cost if the consumer pays only the minimum due. Issuers also have to display the payment amount and total interest cost to pay off the existing balance in 36 months.

A New Level of Accountability for Government Regulators and Issuers

The act ensured accountability from both credit card issuers and regulators who are responsible for preventing unfair practices and enforcing protections including:

• Public posting of credit card contracts – Credit Card issuers are required to make contracts available on the Internet in a usable format.
• Regulators held accountable to enforce the law – Regulators are now required to report annually to the US Congress on their enforcement of credit card protections
• Holds regulators accountable to keep protections current – Regulators are required to request public input on trends in the credit card market and potential consumer protection issues to determine what new regulations or disclosures might be needed.
• Regulators will be required either to update the applicable rules, or to publish findings if they deem further regulation unnecessary.

Increased Penalties for Credit Card Providers Who Violate the Law

Card issuers which violate the new restrictions face significantly higher penalties than under previous law, which should make violations less likely.

Protections for Younger Consumers from Pervasive Practices

The CARD act contains protections for college students and young adults, including a requirement that card issuers and universities disclose agreements with respect to the marketing or distribution of credit cards to students.

Many Changes, But Some Things Remain the Same

While the CARD Act of 2009 made many changes to the way business is transacted between consumers and their creditors, some things did not change. Despite relaxing rules for “grace periods” and enhanced information transmission on credit card statements, the basic relationship remains the same. The Credit Card issuer can make changes to an account and increase rates or fees by informing the consumer it is doing so. The interest rates charged and decisions on security of debt are still made by the creditor. Credit Card providers can cancel, change account limits, or charge-off bad debts under their own policies.