On May 22, 2009, President Obama signed the Credit Card Accountability, Responsibility, and Disclosure Act (“Credit CARD Act”).  What does this new law mean for consumers?  The Credit CARD Act aims to prohibit some of the lender practices that trap consumers in a vicious cycle of debt and give  better information to card users.  The Act does not place a limit on interest rates that lenders may charge.

While the spirit of the law is to help consumers, like any new law, there may be some loopholes or unintended consequences.  Predictably, criticism of the law is split between the financial services industry and consumer groups.  The creditors say the new law will force them to increase fees in other areas and deny credit to many people at a time when they need it most.  Consumer groups say the law is a beginning but that it doesn’t go far enough.  Because most of the provisions of the Credit CARD Act begin on February 22, 2010, many accounts were subject to big rate increases or other anti-consumer changes before this date.

Highlights of the Credit CARD Act’s specific provisions are as follows.  All provisions are effective on 2/22/2010 unless otherwise noted.

Payment Protections

  • Payments applied to highest interest charges first!  This will be a great help to many consumers with balances at different interest rates.  The new law requires that payment amounts over the minimum go toward the highest-interest portion of the balance first.  Currently payments are applied to the lowest interest rate debt first, and the highest interest rate last; A practice that’s good for lenders but bad for borrowers.
  • 21 days to pay.  The creditor must mail the statement 21 days before the due date, not 14 as some now do, sometimes with little or no notice.  Note: This provision went into effect on 8/20/2009.
  • No funny business on payment due dates.  No late fees may be charged for payments received by 5 pm on the due date or the next business day if the due date falls on a holiday or weekend.  This will prohibit the practice of some creditors that impose arbitrary early-morning time requirements on the due date.

Interest Rate and Fee Protections

  • Limits on Penalties and Penalty Interest Rates.  Currently, late payments can trigger a “penalty” rate of interest to apply retroactively to the balance owed.  Under the new law, no penalty rate may be imposed on an existing balance unless the payment is 60 days late.   Even then, if payments are on time for the next 6 months, the old interest rate must be restored.
  • The first year, interest rates are locked in.  No interest rate increases will be allowed during the first year of a credit card contract unless you fall under the 60 days late penalty provision (see above) or the rate is a special introductory rate (see below).
  • Specials can’t immediately disappear.  Special “introductory rates” must be for at least 6 months.
  • No more universal default provisions.  A universal default is when a credit card contract counts any late payment, or “default,” against the consumer.  This means that a late payment with completely unrelated creditors (like utility bills) can be used to increase the interest rate on the consumer’s credit card. These provisions are now commonplace.
  • If the credit card rate does go up, there’s a pay-off option.  If interest rates are increased for legitimate reasons, the credit card company must send a notice.  The notice will set out the consumer’s right to cancel the card and pay off the remaining balance under the existing interest rates and terms, over a reasonable period of time.  Note: This provision became effective on 8/22/2009.
  • No more “double cycle billing.”  Double cycle billing only affects consumers who carry a balance from month to month.  The term refers to the fact that creditors can use both the current month and the previous month to compute the average daily balance, the figure on which interest is computed.  This computation means that a prior month’s higher balance can allow a higher interest charge for the next month’s lower balance.
  • Limits on “over limit” fees.  Under the new law, credit issuers cannot charge an “over limit” fee unless the consumer first consents to such charges.   If the consumer does not consent to over limit fees, any purchase over the consumer’s limit will simply be declined.
  • No late fees that aren’t the consumers’ fault.  Creditors cannot charge a late fee due to their own delay in crediting payments.  Any late fees that are charged must be “reasonable.”
  • No fees for telephone or electronic payments.  Creditors cannot charge fees to consumers for making payments via mail, telephone or electronically unless live help is required.

Knowledge Can Give You Power

  • 45-day notice of increases.  Under the new law, there must be at least 45 days advance notice of any increases in interest rate, fees or penalties.  Note: this provision became effective on 8/20/2009.
  • Now we’ll really know.  Credit card statements will be required to list how long it will take to pay off the balance at the minimum payment and how much it would take to eliminate the balance in one year, two years and so on.  Issuers will also be required to post contract terms on line for easy consumer access.

Other Provisions

  • Are you 21?   Card issuers will be prohibited from giving a credit card to any one under 21 unless they have a co-signer or the minor can prove his or her ability to pay.
  • Leave those students alone.  The new law restricts aggressive marketing to college students.  Students are now graduating with an average of over $4,000 in credit card debt.
  • Gift card rules.  Gift cards will not be allowed to expire for at least 5 years and declining values and hidden fees will be prohibited.
  • Investigation of intercharge fees.  Another way that card issuers make money is to charge retailers, restaurants and other merchants a fee for each charge a customer makes with that business.  These are called intercharge fees and they run 1 to 2% of the purchase amount.  These fees are ultimately passed to the consumer.  Studying these fees may lead to further changes that will benefit consumers and merchants alike

So What’s the Downside?

Card issuers have taken advantage of the months prior to the February 22, 2010 effective date on most of the protections of the new law by raising rates and fees. It is also likely that credit card issuers will find ways to replace the income they will lose from the Act’s restrictions on fees and rates.  For example, annual fees may increase, rewards programs may disappear, and new fees may arise for items not covered by the Credit CARD Act. Zero percent interest is likely a thing of the past and card issuers will be more cautious about giving credit to those with poor credit histories.  On the other hand, since Americans have long had too much credit, it may be a good thing to have a little less credit and a greater understanding of the price we pay for credit.