Credit CARD Act offers new protections
By Suzanne Smither
Credit card statement shock should soon be a thing of the past, thanks to the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009. Two of the provisions of the new law, also known as the Credit Cardholders' Bill of Rights, take effect Aug. 20, 2009; the rest kick in Feb. 22 and Aug. 22, 2010.
Burdened by rate hikes and snared by fees, American credit card holders have been paying about $15 billion a year in penalties. Even if you always pay on time and never incur penalties, you may have had to do some uncomfortable budget juggling when your interest rate unexpectedly doubled or your 2 percent minimum payment ballooned to 5 percent with little warning.
The Credit CARD Act puts an end to these unpleasant surprises by:
banning unfair rate increases;
preventing unfair fee traps;
requiring plain sight/plain language disclosures;
holding credit card companies accountable for their actions;
and
affording special protections for students and young people.
"With this new law, consumers will have the strong and reliable protections they deserve,” President Barack Obama said
as he signed the Credit CARD Act on May 22.
Provisions going into effect Aug. 20, 2009
Credit card issuers will have to give you at least 45 days' notice before changing your card's interest rate or making other significant changes to your account, such as increasing fees or finance charges.
While there's no cap on the size of potential interest rate hikes and fee increases, your credit card company is required to enclose a “right to cancel” statement allowing you to reject any proposed changes by canceling your account. If you exercise this option, you cannot be required to immediately pay the outstanding balance in full.
Also starting this month, credit card companies must set your payment due date no less than 21 days from the time they mail your bill.
Effective Feb. 22, 2010
A related section of the Credit CARD Act, which goes into effect next February, requires issuers to end fee traps like setting your payment deadline for a different date each month, or requiring payment on the morning of the deadline day.
The new law requires credit card statements with stable due dates – if it's the 15th of May, it must also be the 15th of June and so on – and sets 5 p.m. as the time of day by which payments must be received. Payments made at local branches must be credited the same day. Also, if the due date falls on a Sunday or holiday when the credit card company does not accept payments, a payment received the next business day cannot be considered late.
Also going into effect Feb. 22, 2010 are regulations that will restrict interest rate increases and institute fairer billing practices.
The Credit CARD Act outlaws "any time, any reason" or "universal default" rate hikes – those that have nothing to do with your payment history on the account in question. Credit card issuers will no longer be able to raise your interest rate at all during the first year your account is open.
Retroactive interest rate hikes on existing balances will be allowed only if your minimum payment was received more than 60 days past the due date, your account has a variable interest rate, or the promotional period has ended. For the latter exception to apply, the promotional rate must have been in effect for at least six months.
Cardholders will likely breathe a heart-felt sigh of relief when “double-cycle” billing – the dubious practice by which credit card companies use the average daily balance for the last two months to calculate interest charges on the current month – bites the dust. Under the new law, you can no longer be charged interest on debt you have already paid.
Credit card companies often charge different rates of interest on different types of transactions, for example, 9 percent on purchases and 14 percent on cash advances. Starting Feb. 22, when you pay more than the minimum due, issuers will be required to apply the excess to the portion of the balance bearing the highest interest rate first.
Arbitrary over-limit fees are also being eliminated. Card companies will be required to offer you the option of a fixed credit limit that can never be exceeded. They will not be allowed to honor over-limit transactions or charge fees for them without your express consent.
An over-limit fee may be imposed only once during a billing cycle in which your balance is higher than your credit limit. However, the over-limit fee may also be charged in each of the next two billing cycles unless the cardholder obtains an increased credit limit or reduces the outstanding balance to an amount below the credit limit.
Beginning in February, the new law also:
fosters responsible lending by requiring credit card
companies to consider a consumer’s ability to pay when
issuing credit cards or increasing credit limits;
substantially restricts fees on subprime, low-limit credit
cards;
prohibits “pay to pay” fees when you pay your bill by mail,
telephone, or electronic transfer, except for live services to
make expedited payments; and
Starting Feb. 22, every credit card statement must contain a “minimum payment warning” informing the consumer that making only the minimum payment will increase the amount of interest paid and the time needed to pay the balance in full. It must specify how many months it would take to pay the entire balance, and the total amount including interest, if only minimum payments are made.
Credit card statements must also inform cardholders how much they would need to pay each month in order to pay off the balance in full in 36 months. They must include full disclosure of payment due dates, late payment penalties, and changes in card terms that take effect upon renewal. Use of the term “fixed rate” is prohibited unless the annual percentage rate or interest rate will not vary for any reason over the period specified.
Card issuers will be required to provide a toll-free number that cardholders can call to obtain information regarding credit counseling and debt management services.
Also coming Feb. 22 are special safeguards for young people, especially college students, who have been subjected in recent years to a barrage of credit card solicitations, including offers of free food and T-shirts in exchange for signatures on the dotted line. The result? Graduating cardholders often leave school with thousands of dollars in credit card debt.
The Credit CARD Act:
increases protections for students against inducements to
obtain a credit card;
increases transparency of affinity arrangements between
credit card companies and universities;
bans credit card solicitations to prospective customers
under the age of 21;
limits prescreened offers of credit to young consumers, and
allows them to opt out;
bars card issuers from providing credit to anyone under the
age of 21 unless a parent or legal guardian co-signs on the
account, or the underage consumer can show independent
financial means to repay the credit obligation; and
prohibits any credit limit increase unless both the underage
cardholder and the other jointly liable individual agree to it.
Effective Aug. 22, 2010
Card companies will have much less leeway when changing rates and setting fees. They will be required to consider the credit risk of the cardholder, market conditions and other significant factors when increasing a cardholder’s annual percentage rate. They must also consider changes in these factors when determining whether to reduce the annual percentage rate.
Card issuers must provide written notice stating the reasons for any increase in a cardholder's APR. They must also review, every six months, accounts for which the APR has increased since January 1, 2009, to assess whether risk has been reduced and any other essential factors have changed.
Any penalty fees charged by a card issuer must be reasonable and proportional to the cardholder's omission or violation.
Finally, the new law enhances disclosure on fees for gift and stored-value cards. It prohibits service fees for these cards, and allows inactivity fees only if a card has been dormant for at least 12 months. It becomes unlawful to sell gift certificates, store gift cards and general use prepaid cards with expiration dates.
Sources: The White House Office of the Press Secretary,
whitehouse.gov
Office of Thrift Supervision, Department of the
Treasury, ots.treas.gov