Here’s What Protections Are — & Aren’t — Offered Under the Credit CARD Act of 2009
The Credit CARD Act of 2009 is one of the most important consumer finance laws you’ve probably never heard of.
It provided a bevy of new consumer protections in the wake of the 2008 financial crisis. Perhaps most importantly, though, the Credit Card Act sets the rules governing credit card fees and interest rates. This prevents card issuers from jacking up interest rates without notice.
But are these protections broad enough? And what about merchants — does the law cover them equally? Let’s find out.
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What is the Credit CARD Act of 2009?
- Credit CARD Act
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 the CARD Act is to protect consumers against unreasonable interest rates and ensure cardholders are billed fairly.
[noun]/kre • dət • kard • akt/
Congress passed the Credit CARD Act of 2009 at the height of the Great Recession. The law expands on existing legislation like the Truth in Lending Act (TILA) 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.
In a broad sense, the law:
- Prevents murky billing language and potentially damaging business practices.
- Dictates when and how creditors can hike up interest rates and fees on credit cards.
- Ensures that consumer disclosures are clear, making it less of a headache to understand credit card terms and conditions.
- Manages how credit card companies can deal with children and young adults, protecting them from predatory lending practices.
Why Was the Credit Card Act Adopted?
In the wake of the Great Recession, it became obvious that expanded consumer protections were vital to the stability of American finance.
Before these new rules came along, credit card agreements were often packed with dense legal terminology that was difficult to understand. Key details were tucked away in hard-to-read jargon. There was little consistency between card issuers, making it hard for people to compare offers. Banks could also hike up interest rates on future purchases and current balances without giving a heads-up to their customers.
These new rules changed the game. Such practices are now off-limits, in the interest of protecting consumers, and also protecting the broader finance ecosystem.
As an expansion of the Truth in Lending Act, the Credit CARD Act of 2009 aims to encourage greater confidence in financial institutions. It has facilitated greater clarity and transparency in both the initial card agreements and monthly statements. Crucially, it has made terms more comprehensible, and the disclosure of penalties and fees much more straightforward.
To ensure marketplace compliance with the new law, the Credit CARD Act created a new entity, the Consumer Financial Protection Bureau, or CFPB. This entity is tasked with serving as a watchdog in the consumer finance space, protecting consumers against unfair practices.
How Does the Credit CARD Act of 2009 Protect Consumers?
In simple terms, the Credit CARD Act 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.
Here’s an outline of the key protections granted to cardholders under the Credit CARD Act of 2009:
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What are the Fee Caps Imposed Under the Credit CARD Act of 2009?
Like we mentioned above, the Credit CARD Act imposes “reasonable and proportional” limits on credit card fees. The fee caps are as follows:
While the Credit 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.
What Does the Credit CARD Act Not Cover?
The Credit CARD Act of 2009 went quite a long way toward improving credit requirements and borrowing practices for consumers. It doesn’t fix everything, though.
There are still friction points experienced by many consumers that the law did little to address. Take variable and penalty rates, for instance.
Issuers that offer a low introductory APR may raise rates annually when the promotional period ends. All promo periods must last a minimum of six months before the variable rate can kick in. After that, though, the bank is free to raise interest rates at will.
Furthermore, 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 one opens a credit account as a set figure. It can fluctuate if the issuer decides to increase the rate on the cardholder’s 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.
Other issues that might arise include:
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 Credit CARD Act limits some predatory lending practices. Still, deferred interest payments are out there and remain quite popular, despite the risks.
Subprime card issuers have historically offered credit cards to consumers with introductory interest rates in the 36-75% APR range. 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.
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.
5 Things to Do if an Issuer Breaks the Rules
So, what should consumers do if they believe their rights have been violated by a card provider? The Credit Card Accountability Responsibility and Disclosure Act of 2009 outlines several options for addressing this issue, including:
#1 | Contacting the Credit Card Issuer
The first step is to directly contact the credit card issuer to dispute the charge, rate increase, fee, or any other action that seems to be in violation of the CARD Act. Often, issues can be resolved at this stage.
#2 | Filing a Complaint with the CFPB
If the credit card issuer doesn't resolve the issue satisfactorily, consumers can file a complaint with the Consumer Financial Protection Bureau. This is the agency tasked with enforcing the CARD Act. Consumers can submit their complaints online via the CFPB's website. The bureau will then investigate the complaint and work to get a response from the company.
#3 | Consulting a Legal Professional
If the problem is severe and hasn't been resolved through the above channels, consumers may want to consider consulting with a lawyer or legal aid service. They can provide guidance on whether it might be appropriate to take legal action.
#4 | Reporting to Other Agencies
In addition to the CFPB, consumers can also report the issue to their state Attorney General's office, as well as to the Federal Trade Commission (FTC).
#5 | Checking Their Credit Report
A card issuer's actions may potentially affect one’s credit. The borrowers should be sure to check their credit report for errors. If they find errors, dispute them with the credit reporting agencies.
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The Credit CARD Act provides significant protections for consumers. But, it's very important for consumers to be their own advocates in asserting those protections. One needs to be proactive in understanding their rights and advocating for themselves when they believe those rights have been violated.
Merchants Require More Protections, Too
The Credit CARD Act of 2009 was primarily designed to provide protections to consumers rather than merchants. That said, it does affect the overall credit card ecosystem.
Although merchants do not need to directly comply with the Credit CARD Act, they do need to maintain compliance with credit card processing rules and regulations.
Take transparent pricing, for instance. Merchants should be clear about all costs associated with products or services. Hidden fees can lead to chargebacks and can damage the business's reputation. They must also ensure secure transactions by investing in security measures such as encryption and tokenization to protect customer data. This protects customers, and also builds trust, which can lead to increased sales.
While the Credit CARD Act doesn't directly provide protections for merchants, it contributes to an overall environment of trust and transparency in the financial world, which can benefit both consumers and merchants alike. It's crucial for merchants to follow ethical practices in all aspects of their business. This should be not only to comply with laws and regulations, but also to build trust with customers and grow their business.
Of course, while consumer protection is good, it can open the door for other issues. Consider chargebacks, for instance.
Regulations like the Credit CARD Act, the Truth in Lending Act, and others have helped set the stage for problems like chargeback abuse. If your business is having issues with chargebacks, contact Chargebacks911® today. Learn how you can recover revenue with the benefit of a 100% ROI guarantee.