Credit Card Act of 2009

The Credit CARD Act of 2009 has saved consumers billions of dollars, and most of them probably don’t even realize it.

The law is commonly called the Credit Card Bill of Rights, and with good reason. It mandates that credit card companies follow fair and transparent underwriting and pricing practices with their customers. It regulates interest-rates, penalties and consumer notification.

It prevents card companies from doing things like giving credit without assessing a consumer’s ability to pay, arbitrarily raising interest rates for being a day late with payment or allowing a consumer to go over the credit limit before imposing a fee for doing so.

Basically, it keeps credit card companies from ripping you off.

Most card companies followed the law prior to its passage, of course, but the laws allowed them to sneak all sorts of pricey practices into the complex contract rules. Most consumers never read the fine print that comes with their agreement and even if they did, it would take a certified public accountant to explain what all the legalese meant.

There’s still a lot of legalese on credit card agreements, but the CARD Act has unquestionably benefited consumers.

The most recent evidence came in June 2018, when Citigroup agreed to pay back $335 million to consumers it had overcharged on credit-card loans. The bank failed to reevaluate customer accounts on a periodic basis as required by the CARD Act.

About 1.75 million accounts were affected. According the settlement, those account owners would receive refunds averaging $190.

Here’s a look at specific ways the CARD Act regulates and has impacted the credit card industry.

Interest Rate Increases

The CARD Act limits the ways a credit card company can hike the interest rate on your credit card. Prior to the law, some consumers experienced what government officials called “arbitrary” rate increases. If their balance exceeded a certain level, the rate automatically increased.

The Act orders a credit card company to give a cardholder 45-day notice before implementing any interest rate increase. When an official notice is sent, the company is required to tell the customer about his or her right to opt out of the agreement. The new interest rate can’t be applied to the account until the date set by the 45-day notice.

Another way that the act limits interest rate changes is by prohibiting “universal default,” which is when a card company increases your interest rate because you defaulted on a loan from another lender. Under the new law, a credit card company can only raise your rates for action directly related to your existing credit card debt.

Interest Rate Reductions

If a credit card company can increase your interest rate based on market conditions, your credit score and other factors, it must also consider those factors when deciding whether to lower your interest rate.

Card issuers must review such accounts every six months (at a minimum). If the factors have changed in the customer’s favor, the issuer will likely be required to lower the rate.

For instance, if your credit score declined and the credit card company increased your interest rate, it must lower it if your score goes back up to its original point. Rates must also be reduced if a penalized customer makes six consecutive on-time payments.

Fair Payment Allocation

Many cards have different interest rates for portions of the balance, often based on enrollment promotions. Before the CARD Act, issuers routinely applied payments to lower-rate balances first. That allowed more of the balance to be charged the higher interest rate. It was a sly way of milking more money out of consumers.

The CARD Act requires above-the-minimum payments to be applied first to the balance with the highest interest rate.

If you have a deferred interest arrangement like “no interest for the first six months,” the creditor must allocate the entire amount you’ve paid above the minimum to the deferred-interest balance during the two billing cycles immediately preceding the expiration of the deferral period.

Statement Requirements

Before the law passed, consumer advocates reported a variety of abuses. They included arbitrarily changing monthly payment due date and changing the times of day that were considered “on-time payment.”

Studies indicated that abuses like those were costing consumers as much as $21 billion a year.

Some of the provisions of the CARD Act limit this kind of irregular assessment of payments.

Statements now must be mailed or delivered to the consumer at least 21 days before the due date. Floating due dates or due dates that change from time to time are no longer allowed.

Late fees and interest rate changes must be clearly disclosed, and issuers cannot charge a late fee greater than your minimum payment.

Credit cards must contain a statement like “Minimum Payment Warning: Making only the minimum payment will increase the amount of interest you pay and the time it takes to repay your balance.”

Card issuers are required to disclose how long it will take and how much it will cost to repay your balance if you only make minimum payments. They must also tell you how much you must pay in order to pay off your balance in three years or less and supply a toll-free number where you can get information about credit counseling and debt management services.

Gift Cards and the CARD Act

The CARD Act granted greater protection in the purchase and use of electronic cards, gift certificates and store gift cards by requiring expiration dates and limiting fees.

These items can’t have an expiration date sooner than five years from the date of purchase. The terms for an expiration date must appear conspicuously on the card.

In addition, companies can’t impose “dormancy” or “inactivity” fees on electronic gift cards, store cards or gift certificates unless they haven’t been used for more than one year. No more than one fee may be applied to a “dormant” card and the terms for that penalty must appear conspicuously on every card or certificate.

Double-Cycle Billing and Late Payment Policies

Double-cycle billing was one way that card companies took advantage of consumers, but it has been eliminated by the CARD Act.

Double-cycle billing is when card companies use the average daily balance on the current billing cycle and the previous billing cycle to calculate the interest charged on your account. This essentially meant that you had no grace period to pay off your bill. If you paid off last month’s bill, you would still be charged interest on the amount you paid.

Late payment violations and late fees were another place the card companies ratcheted up profits. Not now.

The CARD Act says that due dates for payments must fall on the same day every month, unless that day is a weekend or holiday. Consumers should receive their monthly statements at least 21 days prior to when the payment is due.

The Act limits late fees to $25 for the first violation and $35 for each violation thereafter for six months. The total late fees assessed may not exceed the minimum payment due.

Marketing to Young Consumers

Credit card companies used targeted marketing materials like t-shirt giveaways to aggressively market to youth, especially those on college campuses, but the CARD Act restricted that greatly.

Students and those from low-income areas, neither of whom had much experience with credit, would sign up for credit cards and spend their way into unsustainable debt.

The CARD Act restricts on-campus or near-campus marketing of credit cards. Any applicant under 21 must demonstrate an independent ability to make payments or have someone 21 or older (i.e. someone who has the means and ability to pay) co-sign the agreement.

Card companies also can’t send pre-approved card offers to anyone under 21, unless the individual agrees to receive them.

Other Provisions

Credit card companies must disclose long-range terms for its accounts. They must spell out for a customer the period of time and total interest charged for someone to pay off the card if they only make the minimum monthly payment.

In addition, companies cannot change so-called “over-the-limit” fees without the terms being made clear ahead of time. Customers must know in advance — and opt in — for what amounts to overdraft protection and additional fees charged to their account.

Another provision relates to the companies’ transparency. The CARD Act requires credit card companies to show the terms of their agreements clearly, without deceptive fine print or other gimmicks.

Exceptions to CARD Act

While the CARD Act provided several protections for consumers, there are still some areas where card companies have a lot of power and there is nothing the consumer can do to stop them from using it.

For example, a card issuer can close your account or lower your credit limit for any reason.

It is one thing to have your account closed or credit limit reduced if you consistently exceed your credit limit, constantly make late payments or default. However, card companies can look at your credit report and if they see something they don’t like, they can close your account with no notice!

The reason could be a) you haven’t used it for several months; b) your credit score plunged for some reason; c) your debt load increased a huge amount and you look like you’re in over your head; or d) they just didn’t want you as a customer anymore.

Closing your account or reducing your credit limit may not affect your credit score, but if you don’t replace the card, your credit score could be dinged because your credit utilization ratio would climb dramatically.

It should also be noted that business credit cards are exempted from all provisions of the CARD Act.

Effectiveness of CARD Act

One of the less-known provisions of the CARD Act is that it requires a government agency to do studies on the law’s effectiveness. That responsibility originally fell to the Federal Reserve and General Accounting Office, but was passed on to the Consumer Financial Protection Bureau, which publishes its studies every two years.

The findings of the first study done in 2012 were that it afforded great financial benefits to consumers. The CARD Act essentially eliminated over-the-limit penalties. Unless you consent to it, card companies are prohibited from processing a transaction if you are over the limit. The CFPB says that alone saved consumers $9 billion in the 3-year span from 2011-2014.

The average late fee, which was $33.08 in 2008, dropped to $26.84 in 2012, or $1.5 billion less in late fees paid by consumers. The allowable limit for late fee payments was raised to $38 in 2017, but not all the card companies went that high.

Also, the number of accounts that had their interest rates raised went from 15% per year to just 2%. That increased in 2018 as interest rates from the Federal Reserve went up .025 in each of the first two quarters and was expected to increase again in each of the last two quarters.

A separate study conducted by The Social Science Research Network (SSRN) confirmed that consumers have gained dramatic financial advantages since the CARD Act was passed. The SSRN study, published in 2013, estimated the consumer savings to be $20.8 billion per year.

Perhaps the most telling measure of success is consumer satisfaction. The J.D. Power Credit Card Satisfaction Survey rates that on a 1,000-point scale.

It was 709 in 2009, the year the CARD Act passed. By 2017 it had climbed to 802, an all-time high.

Credit Card Act Violations

If you think your CARD Act rights have been violated, the CFPB advises consumers to contact the credit card issuer first to allow it to resolve the issue. If there is no resolution, you can file a complaint with the CFPB either online or call 855-411-2372.

Common complaints are billing, advertising, fees, interest rates, rewards and collection problems. Each complaint is assigned a tracking number. The CFPB investigates the complaint to determine if laws were violated and action is needed.

Consumers can log in to the CFPB’s complaint system to track the status of their credit card complaints using the tracking number assigned to their case.

Prior to 2011, no single regulatory agency handled consumer complaints. It didn’t take long for the CFPB to get its first scalp.

In 2012 it fined Capital One Bank for pressuring and misleading two million customers into buying additional products when they opened their credit card accounts. The bank had to refund about $140 million and pay a $25 million penalty.

The crackdowns have continued, which is why Citibank agreed in 2018 to return $335 million. If you received one of those $190 checks, you know why the Card ACT of 2009 is called your bill of rights.