In May of 2009, Congress passed and President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009 – the Credit CARD Act – the most sweeping statutory changes in card protections for consumers since the Truth in Lending Act was enacted in 1968. The new law is intended to help protect consumers from abusive fees, penalties, interest rate increases and other unwarranted changes in account terms. While the law generally became effective on Monday, February 22, 2010, some important changes went into effect on August 20, 2009, and others not until August 22, 2010.
Here's a look at some of the key changes:
Prohibitions and restrictions on rate increases
Starting on February 22, 2010, card issuers generally can't increase the Annual Percentage Rate or APR (the cost of credit expressed as a yearly rate, including interest and other charges) on existing balances for one year after the account is opened except in these four situations:
- When the bank disclosed, at the time the account was opened, that the APR would increase sooner;
- When the APR for a variable-rate card changes due to increases in a published index that is outside the card issuer's control, such as rates on U.S. Treasury securities;
- When the APR, fees or finance charges increase as a result of the consumer not satisfying a "workout" arrangement (a debt reduction or other concession agreed to by a card issuer to help a struggling borrower); or
- When the APR, fees or finance charges increase due to the consumer not making the required minimum payment within 60 days.
After the first year of the account, the card issuer can raise a consumer's interest rate, but the higher rate can only apply to new transactions and it cannot exceed the potential interest rate increase previously disclosed to the cardholder.
The card issuer also must generally provide a 45-day advance notice of any rate increase or any other significant changes in account terms, up from 15 days. This requirement of the law became effective on August 20, 2009. In that same notice, card issuers must inform consumers of their right to cancel their card before the rate increase or account changes take effect. Consumers who decide to cancel their card will repay at the "old" (lower) rate, and they cannot be required to immediately repay the outstanding balance.
In addition, starting August 22, 2010, and at least every six months, card issuers must review interest rate increases dating back to January 1, 2009. As part of that review, the lender must reassess the risk factors that led to the rate increase and reduce the APR going forward, if appropriate. And if the card issuer instead believes an increase in the APR is warranted, it must provide the customer with a written notice explaining the reasons.
Card issuers also generally can continue offering low introductory rates – more commonly known as "teaser rates." But beginning February 22, 2010, these initial rates must be disclosed in a clear and conspicuous manner and cannot increase until after the advertised period, which must be at least six months.
New limits on fees and interest charges
One of the most important changes requires that monthly statements be mailed or delivered at least 21 days before the payment due date, an increase from 14 days. This provides consumers more time to pay the bill before incurring late fees or additional interest charges if there is a grace period. This provision of the law took effect August 20, 2009, and applies to all open-end credit, including credit cards and home equity lines of credit.
Other important changes effective February 22, 2010, encourage fairness in the way card companies handle consumer payments:
Cards with multiple interest rates: For example, a low rate on a balance transferred from another card and a higher rate on new purchases – card companies will be required to apply payments (the portion over the minimum payment) to the highest-rate balances first. This will eliminate a current practice of some card issuers that apply a consumer's payment toward balances with the lowest rate first and leaving the highest-rate balance to continue accruing interest costs. Other requirements govern how card payments will be applied in cases of deferred-interest plans – those that do not begin to accrue interest for several months after a purchase.
Double-cycle Billing: An often costly practice also known as two-cycle billing will be banned. A card company considers the current balance on the credit card when determining interest charges and factors in the average daily balance from the previous billing period, even if a portion of that previous balance was paid.
Also starting on February 22, 2010, credit card issuers must provide new, clearer and timelier disclosures of account terms and costs – before and after an account is opened. This will help consumers choose the right card, shop for better deals and avoid mistakes.
Monthly credit card statements will be changing in two significant ways:
- Statements must include a box showing cardholders how much interest and fees they’ve paid during the current year.
- Statements will include details warning consumers about the high costs of making the minimum payment.
Periodic statements also must prominently disclose the due date for the next payment, as well as the amount of any potential late fee and the date it would be charged. Statements also must include a notice that one or more late payments may trigger an increase in the interest rate on the account and they must disclose the penalty rate.
Finally, consumers may benefit from a requirement that card companies post their standard credit card agreements on the Internet. This is intended to make it easier for consumers to compare the terms of different credit cards and understand the interest rates and fees that are being charged.