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If you have a credit card in the U.S. today, you pay a lot less in fees than people used to. You also cannot be subjected to a change in interest rate without notice, and you receive much clearer communication from the card’s issuer. Credit card marketing aimed at young people, which often led them to take on debt they could not manage, has become a lot less aggressive.
That’s all due to one law: the Credit Card Accountability Responsibility and Disclosure Act of 2009, or Credit CARD Act, for short. The law radically changed how companies that issue credit cards treat their customers, and resulted in those customers keeping a lot more of their money.
Before it came into effect, understanding credit card offers and statements, and making sure users would not be hit with various fees, often required poring over cryptic fine print.
College students were especially targeted. Come orientation week, college quads were littered with credit card marketers offering freebies in exchange for signing up for a card.
Many signed up for cards whose terms they didn’t understand, agreeing not just to sky-high interest rates but also to a number of excessive fees. Some so-called starter cards even became known as “fee harvester” cards, helping companies rack up revenue from unwitting consumers.
“These cards were notorious for harvesting excessive fees,” says Bruce McClary, Senior Vice President of Communications at the National Foundation for Credit Counseling (NFCC). “Any transaction you can think of, they’d take a fee on.”
But it wasn’t just college students who benefited from the new rules.
In fact, according to the Consumer Financial Protection Bureau, the regulations saved all Americans $16 billion in fees just in the first six years since being signed into law by President Barack Obama.
“The CARD Act outlawed a lot of predatory practices that existed in the credit card industry,” says Steven Dashiell, a credit card expert at Finder, a site helping people compare financial products.
It also introduced a broad range of regulations mandating how and when credit card companies informed their consumers. It made credit card offers and statements shorter and clearer, and it capped fees.
Let’s take a closer look at all the consumer protections the law introduced.
The CARD Act’s Key Provisions
The Credit CARD Act of 2009 breaks down into five titles, or key areas:
1. Consumer protection
This title limits fees and interest charges, specificies how much advance notice consumers need about interest rate changes, and caps fees on so-called subprime credit cards — those issued to people with low credit scores. It also mandates that payments are due on the same date each month, and it ensures that credit card companies consider a consumer’s ability to repay (i.e. their income) before issuing them a line of credit.
2. Enhanced consumer disclosures
This title mandates that credit card companies show consumers how long it will take them to repay their debt if they only make the minimum payment, ensures that they disclose deadlines for late fees, and orders that user agreements be posted online. It also regulates credit card marketing to prevent deceptive practices.
3. Protection of young consumers
The Act then says that issuers can’t give a card to anyone under 21 unless they have either proof of income or a cosigner older than 21. It also prevents credit card marketers from making offers on college campuses.
4. Gift cards
This title prevents issuers from charging fees on gift cards, such as for inactivity or service fees, unless that is clearly disclosed to the consumer and there has been no activity on the card for at least 12 months. It also prohibits the sale of gift cards with expiration dates.
5. Miscellaneous provisions
Among other things, this title says that the Consumer Financial Protection Bureau — which was created in 2011 in response to the Great Recession — must produce every two years a study of the credit card market and report its findings to Congress.
Now, let’s look at some specific protections in more detail:
Rates Can’t Increase Without Notification
Most credit cards have variable interest rates, which can change based on the Federal Reserve’s raising or cutting of its benchmark rate, known as the federal funds rate. Broadly speaking, the higher the interest rates in the economy, the higher the annual percentage rate (APR) on your credit cards, too.
Issuers don’t have to notify you of a rate change, in this case. But if you have a fixed interest rate credit card, they have to send you an advance notice.
“Interest rates cannot increase without notice — you have to have 45 days of notice,” says Summer Red, Accredited Financial Counselor and Professional Development Manager at the Association for Financial Counseling & Planning Education.
Issuers don’t have to give you notice of a rate change if you have a teaser rate or introductory offer at a lower APR, though.
If you have a credit card with a variable interest rate, the card issuer may increase your APR also based on your credit score. If your score drops, your rate may go up, because the lender sees you as a borrower with a higher risk of not paying.
If that happens, creditors must review your account at least once every six months to reassess your risk as a borrower, the CARD Act says. If your score improves, they must reduce your APR.
Rates Can’t Increase Retroactively
“Providers can’t retroactively raise your interest rates for the balance you already have,” Dashiell explains — unless your card has a variable interest rate.
Without the CARD Act, you could get hit with rate increases that apply retroactively, leaving you buried under interest you didn’t anticipate.
Billing Is Clearer
The CARD Act did a lot to streamline and clarify billing. For starters, it mandates that your payment due date is the same each month, and that you get at least 21 days’ notice before you have to pay. Payments have to be accepted up until 5 p.m. on the due date, and if you mail a payment and it arrives on a holiday or a weekend, it can’t be considered late.
The Credit CARD Act of 2009 offers critical protections for you, but you still need to take the time to read the terms and conditions on credit cards before choosing one.
If you make a payment beyond the minimum, the CARD Act ensures it goes where it will be most helpful for you. “Payments over the minimum amount you owe in that month are now allocated to the highest-interest-rate balance on your card,” Dashiell says.
The Credit CARD Act also did away with a pesky practice called double-cycle billing. Prior to the Act’s passage, some creditors didn’t just look at your statement for the last 30 days when applying interest; they went as far back as 60 days, or two monthly cycles. This could leave you paying interest on a charge from two months earlier, even though you had paid the card off in full that month.
Fees Are Regulated
The CARD Act also caps fees in the first year a card is open; you cannot be charged fees totaling more than 25% of your total line of credit. The only exceptions are late fees, fees for going over your credit limit, and fees for a payment returned for insufficient funds.
The Credit CARD Act dictates that card issuers have to clearly tell you when a late fee will be charged, and the amount of that fee. Plus, it says that late payment fees, over-the-limit fees, and any other penalty fee or charge “shall be reasonable.”
The Act also mandates that if the card issuer moves addresses or changes how they handle payment, and that results in a payment past the due date, they can’t charge you a late fee.
“Before the Act, credit card companies could approve transactions over your limit and then charge you a fee for that. Now, you have to opt into that,” Red explains.
Before the CARD Act, you could be charged for not using a credit card. Those were so-called dormancy or inactivity fees, and they could hit you if you did not use a card for a period of time, which varied according to the card’s issuer. That can’t happen now.
Disclosures Are Easier to Understand
The entire second title of the Credit CARD Act of 2009 focuses on enhanced consumer disclosures. This is all about not just protecting consumers, but also empowering them to make financial choices.
Thanks to the Act, “disclosures are clearer. Statements are easier to read,” McClary says.
A major change brought by the law is that now you have a box clearly isolated on your statement, explaining how long it would take you to pay off your balance if you only made the minimum payment every month.
Young Consumers Are Protected
Before the Credit CARD Act, young consumers who lacked financial education could easily get buried in card debt.
“I got my very first credit card when I was barely old enough to get one, despite the fact that I didn’t have a job,” Red says. “It was a $1,000 credit card. Four hours later, I had a $1,000 computer and a maxed-out card.”
That was before the CARD Act. Times have changed thanks in large part to the third section of the Act, which specifically protects young consumers. Credit card marketers can no longer offer incentives to sign up, like free meals, on or near college campuses.
People under 21 years old must show they can repay debt, or have a cosigner who’s over 21 and guarantees for them.
Credit reporting bureaus such as Equifax, Experian and TransUnion also cannot share the reports of people under 21 with credit card issuers, unless the consumer requests it. That has cut down on the number of unsolicited offers of credit young people get by mail.
Criticism of the Credit CARD Act
Critics of the CARD Act have said it has made cards more expensive, by forcing issuers to recoup in other ways what they used to make in fees.
“Some critics say that it caused interest rates across the market to increase because lenders were trying to make up for revenue streams that were restricted under the rule changes,” Dashiell says.
According to others, the law hasn’t gone far enough; some “believe that the fees for your first violations are still too high,” Dashiell says. It has “stopped short in key areas,” says McClary. For example, the law doesn’t require advance notice of APR raises due to rate increases by the Federal Reserve.
The Credit CARD Act of 2009 lays out a broad range of protections for consumers, especially young ones. It also mandates that credit card issuers provide the information consumers need in a way that’s easy to understand.
But it’s still important to be responsible with your credit cards. Use them for their perks and rewards, but not to buy things you could not afford to pay in cash, and try not to carry a balance, which would be subject to high interest payments.
“It’s a myth that you have to carry a balance to establish a credit history. Pay off your balance in full each month,” McClary says.
The CARD Act has introduced many measures that favor the consumer, but ultimately your financial health is still your responsibility. While you now have more information laid out clearly in front of you, you should make sure you understand all of it, and avoid taking on financial burdens beyond your means.