Image by Steve Buissinne on Pixabay
By Ivan Serrano
Published November 2, 2023
Credit cards offer immense convenience to consumers, but they also pose a danger. The soaring credit card debt in America reflects a robust consumer economy: The latest statistics show it rose over $1 trillion in the second quarter of 2023. However, it’s concerning that the number of individuals failing to repay their credit card debt has reached an 11-year high.
More than a decade ago, Congress aimed to empower consumers with a clearer understanding of their credit card rights and ensure fair practices within the industry. This law, known as the CARD Act of 2009 (standing for Credit Card Accountability Responsibility and Disclosure Act), expanded upon the existing Truth in Lending Act. Its primary objectives were to enhance transparency regarding credit card terms and conditions, as well as to impose limitations on fees and interest charges.
The CARD Act of 2009 brought about new safeguards for consumer credit cards, although it does have certain exceptions. As a consumer, you should know both how the CARD Act protects you, and how it does not.
The CARD Act of 2009 is a federal statute enacted by Congress and signed into law by President Obama on May 22, 2009 to protect consumers from unfair practices by credit card issuers. The CARD Act regulates many behaviors of credit card companies, but perhaps most importantly it requires greater transparency from issuers and limits certain charges and interest rates.
When it comes to transparency, the CARD Act allows consumers to make informed choices by mandating disclosure of certain information by the credit card issuer. As a prominent example, issuers must tell consumers in every statement how long it would take to pay down their debt if they make only the minimum monthly payment. The CARD Act also requires credit card companies to give accountholders details on accessing their annual credit report.
Before passing the CARD Act 2009, credit card issuers could raise interest rates for future and past purchases without advance notice. With the CARD Act, issuers generally must wait for new accounts to be a minimum of one year old before raising interest rates. They also must give credit cardholders 45 days’ notice of any changes in the terms and conditions, allowing them time to close the account.
The law also requires card companies limit their fees to what is “reasonable and proportional,” placing caps on late fees, annual fees, over-the-limit fees, and more. And it prohibits practices like charging interest on already paid-off balances, which somehow was legal before under certain circumstances.
The CARD Act of 2009 covers many aspects of the credit card industry with the goal of protecting consumers from unfair practices. These restrictions apply to companies that directly issue cards like American Express and Discover, as well as banks likes Chase and Wells Fargo that issue cards over the Visa and Mastercard networks.
Among other credit card marketing strategies to be aware of, issuers routinely offer promotional rates to encourage the usage of credit cards for making purchases. However, prior to the CARD Act, issuers would sometimes impose interest based on the balances accrued under these promotions after the period ends.
Under the CARD Act, issuers cannot apply later rate hikes onto transactions made before the promotion. Card companies also must disclosure to new cardholders information about the length of the promotion and the rate increase when it ends.
The CARD Act protects consumers from usurious practices. However, consumers should typically only put big-ticket items on a credit card at promotional rates if you clearly understand the terms and have a plan to pay them off.
Financial institutions issuing credit cards used to raise interest rates on the existing balances based on a cardholder’s record of paying other bills. Known as universal default, card companies would use payment records with utility companies and unrelated creditors as the basis for interest rate increases.
The CARD Act ended the practice of using outside information to raise interest rates on existing balances. However, issuers can use that information to raise rates on future balances as long as they provide a notice at least 45 days before the increase.
Your credit card balances may involve several kinds of transactions including regular purchases, cash advances, and balance transfers, which may each charge of different interest rates. Under the CARD Act, when an accountholder pays less than the entire balance, the payment must go first to the transactions with the highest interest rates. Any excess amount trickles down to the next highest, and so on.
This wasn’t always the case. Prior to the CARD Act, card issuers would typically apply payments to transactions with the lowest interest rates and work their way up. That way you’d pay the most interest and they’d make the most profit.
If you have a credit card, you might have noticed that your statement date is always 21 days before your due date or more. This is because the CARD Act requires issuers to give accountholders enough time to pay their bills.
The due dates for your billing cycle will also be on the same day each month, which is a requirement of the CARD Act in order to provide consumers reliable expectations. Additionally, the act prohibits setting arbitrary cutoff times for payment in the middle of the day (which can lead to late payments), requiring all payment deadlines to be set at 5 p.m. or after. And it requires that customers whose due dates fall on weekends and holidays may pay on the next business day without penalties.
And suppose issuers make terms changes that slow down the crediting of payments to the account. They cannot charge fines or interest within 60 days after the change.
Over-limit Fees (the credit card equivalent of an Overdraft Fee) have long been a thorn in the side of many credit card accountholders. Under the CARD Act, card users can now decide whether to allow or deny over-limit fees. Transactions that will make the account exceed the credit limit will not go through for those who deny it. (You may have to dig to figure out how to turn this over-limit “protection” off on your own account however.)
Additionally, issuers may not charge cardholders who opt into over-limit protection more in fees than the excess amount by which they’ve exceeded their limit. (Suppose the account went over the credit limit by $10. The over-limit fee may not be more than $10.) And issuers can only charge one over-limit fee per billing cycle.
The CARD Act caps the fee for making a late payment at $25 for one late payment over six months. The cap goes up to $35 for two or more late payments within six months. This cap may go up over time, adjusting for inflation, at the Consumer Financial Protection Bureau’s (CFPB) discretion.
But remember, these late fees are separate from whatever interest rate the company may charge on your balance.
Before the CARD Act, some credit card companies would actually calculate your interest payment including balances from the month before that you’d already paid off. This so-called double-cycle billing could be found in their card agreement but took many cardholders by surprise.
Under the CARD Act, card issuers must compute finance charges on outstanding credit card balances in the current cycle only. They may not go back to the previous billing cycle, thus protecting consumers from paying interest fees a second time on balances they’ve already paid.
The double-cycling restriction does not apply to adjustments due to reinstatement of a disputed charge or when a payment fails.
While credit card issuers are about to change their terms and conditions at any times, under the CARD Act, cardholders can decide to reject changes in by canceling the account within 45 days of notification of change. You can opt out by informing the credit card company that they will close the account. (You must agree to pay off the balance under the old terms.)
Some issuers offer cards for people with a less-than-stellar credit score but impose account opening fees. These so-called subprime cards, sometimes called “fee-harvester cards,” typically have low credit limits and high interest rates. Under the CARD Act, the cost to open a card must be 25 percent or less of the first-year credit limit of the account. (These limits do not include subsequent fees a cardholder might incur like over-limit, late, or payment return fees.)
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Under the CARD Act, credit card issuers may not market or issue cards to consumers under 21 unless they have a cosigner or can show proof of their own independent ability to pay. Issuers also may not increase young adults’ credit limits without their cosigner’s written consent or demonstrable ability to pay. And the CARD Act prohibits credit card marketers from being within 1,000 feet of a college campus if they are offering gifts to entice college students.
Credit card companies must specify the consequences of making minimum payments to an account. These include the number of months it would take to pay off the balance and the amount to pay the debt off over the course of 36 months.
The CARD Act may sound like it gives a lot of protections to credit card holders, and it does. But it’s also important to aware of what the act does not do:
It’s also important to remember that the CARD Act is not the only law impacting your rights as a credit card customer.
As one example, if you’re a member of the military then you have special protections under the Servicemembers Civil Relief Act where you actually have a right to reduce your maximum interest rate on any credit debt you incurred prior to your service to no higher than 6% for the duration of your active duty. The cap actually applies not just to credit cards but to other loans like student loans or car loans. Though it does not apply to loans taken out during your service, like mortgage VA loans. (You should also know that taking advantage of your protections under the SCRA requires you to request the reduction from your lender in writing.)
All American credit cardholders are also protected from unauthorized credit card charges under the Fair Credit Billing Act. This is the law that allows you to dispute fraudulent charges and get your money back.
The CARD Act of 2009 is a step towards more transparency from credit card companies and consumer protection. It regulates some critical issues of personal credit card users, including limits on specific fees. A CFPB report in 2015 found that in its first five years the CARD Act saved consumers more than $16 billion dollars.
However, it does not cover everything that might affect some consumers, and it is best to be aware of these deficiencies. There remains room for improvement in protecting American consumers from misleading or predatory credit card practices.
Ivan Serrano has been been a technology and business writer since 2015. He is obsessed with our constantly evolving fast-paced society and finding ways to teach readers something new. He has worked with companies like SmallBizClub, StartupNation, Namecheap, Time Doctor, and Searcheye—which has a business relationship with FairShake.
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