The Credit Card Accountability Responsibility Disclosure Act of 2009, also known as the Credit CARD Act, was a federal statute signed by President Obama in 2009 with the intent of providing transparency as well as fairness to the credit card lending industry. The legislation ultimately received bipartisan support by the Senate and House of Representatives prior to the President's signing. It is the most monumental piece of legislation to impact the credit card industry from a consume protection standpoint in several decades. Below are the key takeaways from the CARD Act outlining prior practices and how they changed after the legislation's enactment.
Prior to the CARD Act, promotional introductory rates could last less than six months. The most common promotional introductory rates are 0% rates and they usually apply to balance transfers and purchases. They are also really enticing as they provide interest free loans for new cardholders. The longer the term, the better the offer is from a savings standpoint as interest does not begin being charged until the promotional period is over.
The CARD Act requires that all introductory or promotional rates last a minimum of six months. In addition, the credit card issuer must disclose the regular, or go-to rate, that will be applied to the credit card at the end of the introductory term. This means that the consumer must be aware of what they will be charged on interest for all unpaid balances on their accounts after the promotional period.
Students, college students over the age of 18, were able to apply and obtain credit cards without proof of employment, a sufficient credit history, or without a co-signer from a parent or guardian with an established credit history. Some credit card issuers also would set up booths or tables on college campuses (or very close to) where they would entice college students to apply for their student credit cards by offering free gifts that included hats, frisbees, and even food. These are commonly referred to as "tabling events." Credit card issuers were also allowed to market to college students via pre-screened or pre-approved offers.
Per the CARD Act, the practice of offering food and/or gifts in exchange for credit cards on or near college campuses or at university sponsored events was prohibited. College students under the age of 21 were also required to provide documentation that showed they had the financial means of repaying debt via income or other means. If they did not have such documentation a co-signature from a parent or guardian was required to be accepted for a credit card. Pre-screened offers were also outlawed unless a student (under the age of 21) had opted in through the credit bureaus to receive promotional offer notices.
When a cardholder bounced a monthly payment check, missed a payment, was late on a payment, or went over their credit limit, a higher APR known as a default or penalty rate was assigned to their credit card account. These payments were in many cases much greater than the current interest rates applied to their existing balances and were also applied according to the Universal Default Clause. The Universal Default Clause states that a lender can raise APR's if you have been late on any payments to your accounts including those with other financial institutions.
Under the guidelines of the CARD Act during the first year a credit card issuer may not apply a higher interest rate on an account unless the cardholder is more than 60 days behind. Additionally, if after 6 months the cardholder has payed the monthly minimum payment or greater on time, the pre-exisitng lower rate must be reapplied to their credit card. After the first year, default rates may be applied to an account provided that the cardholder has been notified at minimum 45 days notice that the new APR will be assessed. This default rate will also only be applied to new balances incurred on the card which is defined or outlined as an amount owed on the end of the 14th day after the bank has provided notice of the rate increase. The Universal Default Rate (see above) was also disallowed.
Online payment fees, meaning a charge to pay a credit card bill when using the online payment service provided by financial institutions were sometimes charged. More commonly, a fee, sometimes called a "convenience" or "processing" fee was charged when payments to an account were made by phone. These fees ranged from $5-$15 and in some cases, even more,
The online payment fees and phone fees were outlawed unless a payment is made with the assistance of a live or virtual banking professional, meaning a customer service representative. For all automated payment systems, either by phone or online, that are able to be used without the guidance of a live employee of the bank, no fees are allowed by law to be assessed.
At times a late fee was charged if a monthly minimum payment (or greater) was made after the due date. Many of these fees ranged from $10 to $39 dollars and were tiered based on the balance on the credit card account. In addition, credit card billing and monthly statements were typically sent out fourteen days prior to the account's due date.
As of August 22, 2010 credit card issuers were no longer able to charge late fees that were higher than the monthly minimum payment on the credit card account. Issuers are also required to send credit card billing statement at a minimum of 21 days prior to the account's due date. A late fee may still be applied when a payment has been received after the due date and the tiered fees for late payments still remains (for most issuers) based on the credit card balance; however issuers may not charge a late payment fee of more than $25 unless one of the last six payments was late and under those conditions it may be as high as $35.
Also, the payment due date, the amount of the late fee if that date has not been met, and the date the fee will be charged must be clearly outlined on a cardholder's bills/statements and the due date must be the same very month. If the lender has a branch, meaning a local office where a payment may be made, and a cardholder goes into that branch to make a payment on their credit card account, the account must be credited on that day. If the payment is made via mail for a due date that falls on a weekend or Federal Holiday, the account may not be penalized if the payment is received the next business day after the holiday or weekend. Finally, late fees cannot be charged for payments that have been received by 5PM on the account's due date.
When the index changed, credit card accounts with variable rates could change without notice. If a credit card account had a fixed APR, this could also change at any given time regardless of the reason provided that the financial institution notified the cardholder with a minimum of 15 days notice. Universal Default was also allowed which permitted banks to raise credit card APR's on accounts where cardholders had made a late payment of 30 days to the account they held with that issuer or any other loans with different financial institutions.
Variable rates may still change without prior notice but APR's may not be increased for accounts during the first year of opening on an existing balance with a few exceptions. The first is when a credit card is tied to a promotional introductory APR. The regular rate to be applied to the account after the intro term must be disclosed with the introductory offer. The second is when a cardholder is more than sixty days behind on their monthly minimum payment. As outlined before in this piece if the cardholder pays the minimum payment or greater after six months on time, the lower rate will be reapplied to the account. If a rate has been lowered due to a negotiation between the financial institution and the cardholder due to a hardship or other similar reason, the rate may be changed if the cardholder does not abide by the terms outlined in the agreement resulting from the negotiation with the issuer.
After the first year that the account has been opened, APR's may be increased by the issuer on new purchases made on the card. Issuers must notify cardholders at a minimum of 45 days before changing all fees and pricing and give the cardholder the ability to cancel their account prior to those fees and pricing terms becoming active. In the event that a cardholder opts to cancel the account, the original rates and pricing will be applied to the account as the cardholder pays off their balance.
Two-cycle billing was a common practice among several credit card issuers. Two cycle billing is eliminating the grace period for people who paid off their credit card balance in full the previous month. It allows credit card issuers to apply interest charges to two cycles rather than the most recent. It is commonly also referred to as double-cycle billing.
Average Daily Balance = (the sum of each day's balance) / (days in the billing cycle)
In many cases there are different APR's applied to different types of transactions. For example, a purchase or balance transfer APR may differ from a cash advance APR. In the era prior to the CARD Act many issuers applied payments made by cardholders to finance charges and balances with lower interest rates which cause higher interest accrual on the accounts and made it more difficult to pay down the total balances on their credit card accounts faster as the portions of their debt with higher interest rates were carried forward from month to month.
The CARD Act has transformed prior payment allocation practices requiring issuers to apply payments to balances with the highest rates if there are multiple balances on a credit card account with different APR's. If only the minimum payment is made however, the balance with the high APR will still not be paid down until the balance with the lower APR is paid in full. In short, all payments made in excess to the monthly minimum payment, the sum of the payment minus the minimum payment, will be applied to the higher interest rate balance.
Strictly making minimum monthly payments result in paying more interest for purchases made with a credit card and take much longer to pay off a balance. Minimum payments were posted on billing statements with very little information in most cases prior to the CARD Act.
Post CARD Act issuers must display on cardholder statements that if they only make the minimum monthly payment on their account the time to pay off their balance will increase as will the amount of interest paid. The notification must also include the amount of time it will take to pay off the balance and the total interest plus the principal if only the minimum monthly payment is made. It has to also clearly state that the numbers are calculated based on the assumption that no new charges are made to the account. Credit card issuers must also provide the same information for consumers to be debt free in 36 months, meaning what payment would be required and how much interest plus principal would be paid. A toll-free number is also required where their cardholders may obtain information on debt management and credit counseling services.
Some issuers would approve transactions that put accounts over their credit limits and charged over-limit fees on a monthly basis until the cardholder was able to make payments that brought the account under its credit limit. The fees ranged from $29-$39 and in some cases were tiered fees based on the balance of the account. In many instances this also triggered a default rate much higher than the existing interest rate charged to the account.
Per the CARD Act, permission is needed to be given to issuers to authorize purchases that will put a credit card account over its credit limit -- however issuers may decline the request. If an account does in fact go over its credit limit, the credit card issuer may only charge a fee once in a billing cycle and may only charge over limit fees for three consecutive months even if making the monthly minimum payment does not put the account under its limit. During the first year an account is opened the issuer may not bump you to the default rate but may at the end of the year. Lastly, if an over the limit fee is charged, the over limit fee cannot exceed the amount that you have exceeded your credit line. For example, if you have gone over your credit line by $10 you may not be charged $39 -- it cannot exceed $10.