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The Credit CARD Act of 2009

Credit CARD Act of 2009

The Credit CARD Act of 2009: What Consumer Protections Does it Offer?

Congress passed the Credit Card Accountability Responsibility and Disclosure Act—more commonly known as the Credit CARD Act of 2009—at the height of the Great Recession. The legislation left an indelible mark on banking and digital commerce in the last decade.

The law expands on the Truth in Lending Act of 1968 by improving the transparency of credit card terms and conditions. It also sets firm limits on specific fees and interest charges that banks can levy against cardholders.

Sounds like a fair deal, right? Well, many consumers feel the protections still don’t go far enough. Merchants, for their part, feel left out entirely.

In this article, we’ll discuss the Credit CARD Act and how it works. We’ll examine what it does to protect consumers, as well as areas in which the law’s protections fall short.

An Overview of the Credit Card Act of 2009

Credit CARD Act

[noun]/* kre • dət • kard • akt/

The Credit Card Accountability Responsibility and Disclosure Act of 2009, more commonly known as the Credit CARD Act, was a consumer protection mechanism implemented in the wake of the 2008 financial crisis. The purpose of of the CARD Act is to protect consumers against unreasonable interest rates, and ensure cardholders are billed fairly.

You can read the full text of the legislation here. But, according to the FTC, this act amends:

#1 | The Truth in Lending Act

The CARD Act prescribes open-end credit lending procedures and enhanced disclosures to consumers, limits related fees and charges to consumers, increases related penalties, and establishes constraints and protections for issuance of credit cards to minors and students.

#2 | The Electronic Fund Transfer Act

The Act aims to address fees and other terms of gift certificates, store gift cards, and general-use prepaid cards.

#3 | The Fair Credit Reporting Act

The new legislation requires FTC rulemaking to mandate that advertisements for free credit reports disclose that free credit reports are available under Federal law at annualcreditreport.com, and to protect young consumers from prescreened credit offers.

#4 | The Omnibus Appropriations Act of 2009

Specifically, the act affects the Mortgage-Related Provisions of the Omnibus Appropriations Act of 2009. The aim here was to clarify the FTC’s rulemaking authority under that act.

The Credit CARD Act of 2009

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In simple terms, the CARD Act of 2009 stipulates that credit card issuers must wait for an account to mature by at least one year before they can raise interest rates. A creditor must inform the cardholder at least 45 days before the increase, allowing the cardholder time to cancel before any rate spike. It also ensures cardholders can’t be charged interest on balances outside of their most recent billing period, as had previously been the practice of many issuing banks.

Additionally, the CARD Act requires that consumer fees be “reasonable and proportional.” This limitation applies to activation fees, annual fees and monthly fees, late fees, set-up fees, and over-limit fees. The CARD Act introduced rules to protect young adults opening credit accounts for the first time. Now, the minimum age to open a credit card without a cosigner is 21, unless a young adult can prove financial independence beforehand.

Lastly, the Credit CARD Act created a new entity, the Consumer Financial Protection Bureau. The CFPB serves as a watchdog entity in the consumer finance space, protecting consumers against unfair practices.

So, that covers the general functions of the Credit CARD Act. Now, let’s break it down, clause by clause.

How Does the CARD Act Protect Consumers?

After the Great Recession, it became obvious that expanded consumer protections were vital to the stability and overall success of American finance.

Prior to the enactment of the CARD Act, credit card companies were free to raise interest rates prospectively on future purchases and retroactively on existing balances without notifying borrowers in advance. The new laws prohibit this behavior. The aim here is to both protect consumers, and also encourage greater confidence in financial institutions.

Here are the key protections granted to cardholders under the Credit CARD Act of 2009:

1. Limit Interest Rate Hikes

As mentioned above, the CARD Act places limits on rate increases from issuing banks. Now, issuers must wait at least a year to raise interest rates on any new cardholder. They must also notify customers at least 45 days in advance of the increase, and inform buyers that they have the legal right to cancel before that period terminates.

Regardless whether the cardholder responds to the notice or not, any APR changes may become active 14 days after notification. However, they may only apply to purchases made after the billing cycle in question.

If the cardholder does decide to cancel, the issuer must provide a five-year grace period in which to repay any outstanding balances at the original interest rate. Minimum payments may go up…  and the issuer could charge double the previous minimum monthly payment.

2. Cancels Double-Cycle Billing

Once upon a time, card issuers could calculate interest rates based on a cardholder’s last two billing cycles. Essentially, they could charge consumers interest on previously paid balances, a practice called ‘double-cycle’ billing.

The CARD Act prevents issuers from charging interest on any balance outside of the most recent billing cycle. In this way, finance charges must be based on average daily account balances for current billing cycles only.

3. Limits Fees

Now, back to the ‘reasonable and proportional’ fees. The CARD Act regulates what, how, and how much card companies can charge consumers in fees.

The breakdown for fee caps are as follows:

Late Fees

Initially, there was a $25 cap on late fees for the first missed payment, then $35 if late payments persisted. As of January 2022, the fees increased to $30 for the first late payment. Creditors may then assess no more than $41 for subsequent late payments, within a 6 month billing cycle.

Over-Limit Fees

The CARD Act essentially eliminates over-limit fees for cardholders, minus one small detail: if a cardholder independently elected to enter into the payment arrangement beforehand. That said, consumers are advised to read the fine print well in advance of opening an account.

Besides this exception, borrowers are no longer subject to over-limit fees. Instead, transactions that would place the cardholder over their allotted limits are summarily rejected, preventing any additional charges.

Miscellaneous Fees

If a borrower lacks a high credit score, they are often charged high up-front costs to attain credit or open a credit card account. The fees incurred can range from higher annual and monthly fees, set up and activation fees, and more.

While the CARD Act doesn’t scrub these fees out, it does place a few hard limits on them. Now, subprime credit lines and cards cannot exceed 25% of the opening credit limit.

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What the CARD Act Doesn’t Cover

The Credit CARD Act of 2009 went quite a long way towards improving credit requirements and borrowing practices for consumers. It doesn’t fix everything, though. There are still problems experienced by many consumers which the law did little to address:

1. Variable & Penalty Rates

Although a few limitations were introduced, card issuers still have several means of raising interest rates. Two major justifications for these rate hikes are:

Variable APR

Issuers that offer a low introductory APR may raise rates annually when the promotional period ends. All promo periods must last a minimum of 6 months before the variable rate can kick in.

Penalty APR

If a cardholder is more than two months late paying their minimum balance, issuers can raise the interest rate to a ‘penalty APR’. This amount is usually detailed in the fine print when a cardholder opens a credit account as a set figure. It can fluctuate if the issuer decides to increase the rate on your existing balance, though.

If the buyer pays on time for the following six months, the issuer must lower the cardholder’s interest rate again. That said, a penalty APR can hang around indefinitely, and may be applied again if the cardholder fails to make on-time payments.

2. Deferred Interest

Another issue consumers may have occurs when retailers offer “no-interest” payments which are predicated on the cardholder paying off any balance before the promotional period ends.

According to the financial experts at Nerdwallet, 0% interest loans may pose a hidden trap for unwary consumers. For example, if a cardholder is unable to pay off their remaining balance before the promotion ends, they may be charged the entirety of the balance, plus a large retroactive interest spike.

The CARD Act limits some predatory lending practices. Still, deferred interest payments are out there and remain quite popular, despite the risks.

The Credit CARD Act of 2009

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3. Interest Rate Caps

The thing consumers wanted most, but did not receive, was an overall cap on interest rates. Subprime card issuers like BankOne and First Premier have historically offered credit cards to consumers with 36%-75% introductory interest rates.

For individuals that are desperate for funds, or need to rebuild credit after a divorce or some other emergency, these cards might seem better than nothing. This is why the practice of high-interest lending seems predatory and underhanded to many consumers.

4. Protections for Small Business Cards

Protections under the CARD Act of 2009 don't extend to all cardholders equally. Business credit cards aren’t afforded the same safeguards as consumer cards.

Many small business owners rely on their credit cards to pay bills, manage systems, and keep their overhead as low as possible. Despite this, they are not counted as individual credit accounts. They are, therefore, not subject to the same protection as personal accounts.

Congress has had over a decade to observe the strengths and failings of the Credit CARD Act. Many would argue that merchants are also individuals worthy of credit protections, and the failure to acknowledge them equally could hold back efforts to improve commerce for everyone involved.

Merchants Require More Protections

Consumer protections like the Credit CARD Act of 2009 empowered consumers to defend against abuse. However, it offered little to help businesses.

Consider chargebacks, for instance. Combined with the rise of the internet and eCommerce, regulations like the CARD Act have helped set the stage for a surge of chargeback abuse. This practice, known as friendly fraud, accounts for roughly 60% of all chargebacks.

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