The Credit CARD Act of 2009Buying & Selling Under the Credit CARD Act: 10 Best Practices for Consumers & Merchants

June 19, 2023 | 12 min read

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Credit CARD Act of 2009

In a Nutshell

Do you know which law governs your credit card interest rates? Or, which agency you can turn to when your rights are abused? In this article, we’ll discuss the Credit CARD Act of 2009 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.

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.

What is 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 the CARD Act is to protect consumers against unreasonable interest rates and ensure cardholders are billed fairly.

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.

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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:

Provide Right to Cancel at Current Rate

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 still go up, though. The issuer could charge double the previous minimum monthly payment, for instance.

Eliminates “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. This was a practice called double-cycle billing.

The Credit 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.

Protection for Young Consumers

The CARD Act also 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.

Limits Fees

The Credit CARD Act regulates what, how, and how much card companies can charge consumers in fees. The legislation requires that consumer fees be “reasonable and proportional.” This limitation applies to activation fees, annual and monthly fees, late fees, set-up fees, and over-limit fees.

Limits 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 of whether the cardholder responds to the notice or not, any annual percentage rate (APR) changes may become active 14 days after notification. However, they may only apply to purchases made after the billing cycle in question.

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:

Late Fees

Initially, there was a $25 cap on late fees for the first missed payment, then $35 if late payments persisted. These fees were later revised; as of January 2022, the fees limit increased to $30 for the first late payment. Creditors may then assess no more than $41 for subsequent late payments within a six-month billing cycle.

Over-Limit Fees

The Credit CARD Act essentially eliminates over-limit fees for cardholders, minus one important detail. Fees may still apply if a cardholder independently elected to enter into the payment arrangement beforehand. Thus, consumers are advised to read the fine print well in advance of opening an account to see if there is any language about over-limit fees.

Besides this exception, transactions that would place the cardholder over their allotted limits are summarily rejected. Cardholders cannot make any additional charges that would put them over their credit limit.

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 include higher annual and monthly fees, set up and activation fees, and more.

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.

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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:

Deferred Interest Another issue consumers may have occurs when issuers 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 Credit CARD Act limits some predatory lending practices. Still, deferred interest payments are out there and remain quite popular, despite the risks.
Interest Rate Caps The thing consumers wanted most — but ultimately did not receive — was an overall cap on interest rates.

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.
Protections for Small Business Cards Protections under the Credit 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.

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.

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.

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