The Credit CARD Act of 2009: Has It Lived Up to Its Potential?

In May of 2009, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act, otherwise known as the Credit CARD Act. This legislation was designed to serve as a Bill of Rights type outline, protecting consumers from unfair or abusive practices they could incur from credit card issuers.

The CARD Act revised credit card policies found in earlier legislation such as the Truth in Lending Act, the Federal Trade Commission Act, and the Electronic Funds Transfer Act.

The overall goal of this legislation was to create full transparency regarding fees and rates. As a result, consumers know what they are getting and can make informed financial decisions. The overall objective was split into four specific goals.

  1. Dissuade credit card issuers from using deceptive practices
  2. Mandate consistency of terminology across all credit card issuers for consumer clarity
  3. Make comparing credit cards easier
  4. Save credit card owners money

Consumer protections guaranteed by the CARD Act

  1. Notifications of account changes: As a cardholder, your interest rates cannot go up unless you are 60 days or more late paying on your monthly minimum payment. After you make on-time payments for six months, the card issuer must restore your original rate. As a cardholder, you must be notified at least 45 days in advance of a rate increase or other significant changes to your initial agreement with the issuer. After receiving this notification, you are allowed to close your account with no closing fee. The issuer cannot place a default on the closed account while you still owe a balance or demand that you pay the balance in full. The issuer can, however, require that you pay the balance back over five years, or they can double your previous minimum monthly payment.
  2. Banning extra fees: The CARD Act protects you from additional fees some credit card companies previously tried to hide from the consumer. You can never be charged an inactivity fee for not using your card enough. And the issuer cannot assess a fee for choosing a particular payment method. For instance, mailing a check will not cost more than paying at the branch teller window. 
  3. Interest cycle: According to the CARD Act, the issuer cannot calculate interest charges on both the current balance and the previous month’s balance. In other words, lenders must calculate interest based only on the balance during a single pay cycle and apply the payment to your highest interest rate balances first.
  4. Clarity: Under the CARD Act, consumers are protected from hidden, misleading, or unclear terms and conditions. Interest rates and other conditions of the card must be clearly disclosed.
  5. Over-limit charges: You cannot be charged an over-limit fee if you are over the limit because of accumulated interest. Additionally, legitimate over-limit fees cannot be added more than once per billing cycle. Similarly, if you go over the limit and stop making purchases, you cannot be assessed an over-limit fee for more than three months in a row if you are making the minimum payment on time. Credit card customers must be given the choice of whether to opt in or decline the opt in offer.  If you do not opt in, your card will be declined when a charge would put the balance over the limit. Declining the opt in feature also means you cannot be assessed a fee for the declined purchase attempt.
  6. Adequate time: The Credit CARD Act protects you from late fees for payment due dates that might fall on a weekend or holiday. The payment cannot be counted as late if it is received by the end of the next business day. All payments secured by 5 pm and all payments made at branch locations must be credited the same day. Additionally, this legislation mandates that statements be mailed or posted online no later than 21 days before an account’s due date to give customers adequate time to pay.
  7. Third-party credit reporting: The CARD Act protects you from penalty rates and fees when a third-party credit bureau reports a default with another lender, including other credit cards. Your card issuer(s) are prohibited by law from imposing additional rates and fees under these circumstances.

. Issuer responsibilities under the CARD Act

  1. Universal default: Under the CARD Act, credit card issuers are forbidden to apply a higher interest rate after a late payment.
  2. Debt transparency: Card issuers are now required to inform cardholders of how long it will take to pay a balance if they only pay the minimum payment.
  3. Banned marketing ploys: The CARD Act eliminates targeted marketing campaigns designed to lure young people, especially students.
  4. Gift card regulations: Card issuers cannot add undisclosed fees and expiration dates to gift cards and non-reloadable pre-paid cards.
  5. Opt in over-limit feature: The CARD Act requires creditors to give cardholders a choice to opt in or decline the opt in feature. Creditors can no longer assess late fees without allowing you to know you will be going over your credit limit. Refusing the opt in feature automatically declines your card if that purchase exceeds your credit limit. This option is designed to prevent unexpected over-limit fees.
  6. Internet Posting: Creditors must display copies of cardholder agreements, fees, terms, and conditions on a website.
  7. Bills and statements: Card issuers are required by law to mail statements or make them accessible online no later than three weeks before they are due.
  8. Schumer boxes: The CARD Act mandates the posting of easy to read terms and conditions listed in Schumer boxes, named after Sen. Charles Schumer. Sen. Schumer introduced this idea and fought for its inclusion in the CARD Act. The clearly defined specifics in the Schumer boxes achieve full disclosure, helping the consumer compare cards and make an informed financial decision.

Tracking the effects of the CARD Act

The CARD Act requires a review of its effectiveness every two years. In 2013 the American Bankers Association concluded that the regulations imposed by the act have been especially beneficial in achieving transparency.

Before the CARD Act, many, but not all, card issuers seemed to pick and choose the information they readily offered. The CARD Act has evened the playing field, making all issuers adhere to the same disclosure rules. The specific stipulations surrounding this disclosure have greatly increased the public’s knowledge concerning credit cards and credit card debt.

Between the first quarter of 2009 and December of 2013, interest rates increased from 16.2% to 18.5% while the “total cost of credit” decreased by 2.00%. The total cost of credit can be explained as the total amount, over and above the amount borrowed, that the borrower has to pay. The contrast between the increased rate and the “total cost of credit” could be seen as a welcome outcome created by the CARD Act. However, some experts believe the increased interest rate is due to economic pressures fueled by a recession instead of being a positive result of the legislation.

Additionally, many people argue that the legislation has created some pushback from the card issuers. With so many restrictions surrounding fees, the card companies’ bottom line took a hit. 

The trade-offs for excellent transparency and regulated fees seem to be hitting cardholders across the board. The unpleasant fallout includes higher interest rates, higher annual fees, lower lines of credit, and increased customer qualifications to obtain a card.

With profitability challenged, card issuers might feel forced to increase their bottom line with solutions that fall outside the CARD Act perimeters. Unfortunately, higher interest rates affect all card owners who carry a balance on their card(s). While there are still some excellent credit cards with no annual fee, some creditors have felt compelled to either add an annual fee or increase an existing one.

Some people also claim the CARD Act has made getting a credit card more difficult, especially for people with limited or poor credit. This portion of the population is suddenly much more of a risk if late fees and other added fees are now eliminated or strictly regulated. Without being able to assess additional fees, some credit card companies are opting to decline more applications. And for the ones who do get approved, an unfortunate effect of the CARD Act might include a lower line of credit as an additional safety measure for the lender.

Problematic loop-holes

The original intention of the CARD Act of 2009 was to put regulations on credit card issuers to protect the consumer. These regulations aimed to make all lenders expose the nitty-gritty details of hidden fees and unclear terms and conditions. The legislation has achieved these goals. As a result, consumers are much more informed about the circumstances surrounding their credit cards than they were a decade ago.

However, in achieving these goals, some unpleasant side effects arose, such as climbing interest rates, increased annual fees, lower lines of credit, and more stringent owner qualifications. 

And now, after assessing the long-term effects of the act, some problematic loop-holes have appeared.

  1. Retroactive rate increases: While the CARD Act of 2009 prohibits retroactive rate increases, there seems to be one exception. Many credit cards offer an introductory interest rate for a limited amount of time. These offers are often seen as “perks” to the consumer; however, the CARD Act does not prevent the issuers from retroactively assessing interest if the balance is not paid in full by a specific date. Unfortunately, this loop-hole quickly makes a “perk” a “catch.”
  2. Add-on amenities: Credit card issuers are still allowed to market various “add-on amenities” to their card users, including the following:  identity theft protection, credit score monitoring, debt protection, and other services not available on the base card. These add-ons are seen as potentially harmful to consumers since the cost is disproportionate to the need and actual use of the service.
  3. Fee harvester cards: Some card issuers charge upfront fees like application fees that exceed 25% of a card’s initial credit limit. These practices are excluded from the CARD Act because the costs are paid before opening the account.

After a decade of existence, the CARD Act of 2009 has provided a great deal of consumer protection. As with any untested guideline or rule, the actual effectiveness could not be fully discerned until it was in place for a significant amount of time. 

It can be expected that the CARD Act would have some unwanted side effects. Now that they have been identified, maybe it’s time to re-think the details of the legislation. Most people would agree that the overall outcome of the act has been positive, and it has achieved its initial goals. While some of the pushback created by the creditors can be expected, many of the loop-holes could be revisited and possibly amended for greater consumer protection.