What Is the Credit CARD Act of 2009?

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The Credit Card Accountability Responsibility and Disclosure Act of 2009 (or Credit CARD Act) was the most significant legislation regulating and reforming the credit card industry in decades. It was put in place to protect consumers against unfair practices by the credit card industry. Today, the CARD Act, as it's commonly known, protects the consumers in numerous ways.

In the years before this law was passed, many consumers and legislators felt that the credit card industry engaged in abusive and deceptive practices. For example, credit card issuers were once free to raise consumers' interest rates for any reason, and without notice. The industry was also allowed to impose unlimited fees, such as late fees and over-the-limit fees, even while card issuers approved transactions above consumers' credit limits.

Card issuers were also often perceived as predatory lenders, especially toward college students and young adults. It used to be common practice for some card issuers to aggressively market their products on college campuses, offering gifts to students who applied for their cards. Young adults were often approved for lines of credit despite having no means to repay their loans, often leading to years of debt.

Although several earlier versions of this legislation had been proposed, the CARD Act was one of the first pieces of legislation signed by the newly elected President Barack Obama on May 22, 2009. Its safeguards have helped credit consumers in many important ways.

How the Credit CARD Act Protects Consumers

The CARD Act includes a wide range of consumer protections, mostly related to interest rates and how they are calculated, fees, disclosures and marketing towards young adults. The law ended these practices:

Double-cycle billing: The CARD Act prohibits a practice called double-cycle billing, an unusual way of calculating interest charges that was unique to the credit card industry. It's hard to imagine now, but before the CARD Act was implemented, credit card issuers would calculate your interest charges based on the average daily balance of your previous two billing cycles. As a result, cardholders were often paying interest on charges that they had already paid off. Today, credit card issuers must calculate interest based on an account's average daily balance during just the previous billing cycle.

Interest rate increases at will: Before the law went into effect, card issuers could raise your rate without reason and not even notify you ahead of time. Under the CARD Act, interest rate hikes on existing balances are largely prohibited, except in instances where rates vary with the prime rate, penalty rates are charged for late payments, or the promotional rates expire. But the law allows you to opt out of any changes made to your credit card, and lets you pay off your existing balance under the previous terms over as long as five years.

The law also banned a practice called universal default, in which a card issuer raised interest rates in response to a late payment reported by an unrelated creditor. And it requires credit card issuers to apply payments to the high interest balances first in cases where a consumer has more than one interest rate on an account.

Unfair fees: Before the CARD Act took effect, credit card issuers could approve your request to spend over your limit—then slap you with an over-the-limit fee for doing so. No more. In addition, under the law late fees are capped at $25 for an occasional late payment (but they can rise for repeated late payments). Also, subprime card issuers can't impose account opening fees that are greater than 25% of the available credit limit.

In addition to limiting unfair lending practices, the CARD Act created new consumer protections:

Help managing accounts: The CARD Act requires card issuers to make disclosures that can help consumers manage their accounts. For example, statements must include information on how long it will take to pay off a balance if only the minimum payment is made each month. Also, card issuers have to give consumers at least 21 days to make payments after their statement closes. The due date has to be on the same day of the month, every month and payments received before 5:00 p.m. on the due date must be credited to the account on that day.

Special protections for students and young people: The CARD Act prohibits issuers from granting new accounts to anyone under 21 years of age unless they have either an adult cosigner or they can show proof that they can repay their credit card debt. The law also requires credit card issuers to remain at least 1,000 feet away from college campuses if they are offering any type of gift to students in exchange for completing a credit card application.

What the Credit CARD Act Doesn't Cover

Despite all the reforms contained in the law, it has been criticized for leaving out certain credit card protections. For example, the law doesn't impose an overall cap on interest rates, so card issuers are free to charge rates as high as the market will bear. Also, small business credit cards are exempt from many of the provisions of the CARD Act, although many card issuers voluntarily have their small business cards comply with most of the protections afforded to consumer credit cards.

Credit Cards for Minors

Even before the the CARD Act, you had to be 18 years old to open a credit card account as the primary cardholder. However, today many card issuers allow minors to become authorized users on their parents' or another adult's account. Allowing your child to use a credit card under your supervision can help them to establish their credit history while giving you a chance to teach them responsible credit card use. It can also give them spending power that can be critical in an emergency. For more information, see "When Should My Child Get a Credit Card?"

The Bottom Line

While perhaps not perfect, the Credit Card Act of 2009 has undoubtedly protected U.S. consumers from potentially millions of dollars in fees and interest in its 10 years on the books. Be sure you know your rights as a cardholder, and raise a red flag if you notice any practices that don't conform to the law. Contact the Consumer Financial Protection Bureau and file a complaint if your concerns go unanswered.

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