It’s not often that the two parties of the U.S. Congress can agree on an issue these days, but one recent piece of legislation that came before Congress and gathered strong bipartisan support was the Card Act, a law aimed at reforming the credit card industry.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 was passed 361 to 64 in the U.S. House and 90 to 5 in the Senate and was signed into law by President Barack Obama on May 22, 2009. The act went into effect in February 2010.
Background and goals
The purpose of the Card Act is to protect consumers from what authors of the bill described as abusive practices of the credit card industry. According to the White House, the Card Act’s goals are to protect consumers from unfair rate hikes and fees by credit card companies. This act is anticipated to have a widespread impact on the overall economy, as nearly 80 percent of American families have credit cards, and 44 percent of cardholders carry a balance on their cards. In 2008 alone, Americans paid nearly $15 billion in credit card penalties.
The Card Act drew its impetus from public angst concerning the exorbitant interest rates charged to some cardholders, particularly ones who had fallen behind or defaulted on their card payments, and a perceived improper targeting of college students and other inexperienced borrowers for high interest cards by the credit card companies. Growing public anger concerning these circumstances was ignited by the economic crisis of late 2008, which pushed many credit card holders into delinquency on payments or default. Congress responded by passing the Card Act.
Provisions
The Card Act has four basic goals: to forbid unfair rate increases, to prevent unfair fee traps, to require credit card companies to present the terms of credit card contracts in understandable, plain language, increasing accountability for credit card companies and protecting young credit card holders and college students from exploitation.
The bill accomplishes these goals in several ways:
For starters, the bill requires credit card companies to give cardholders 45 days notice before they hike interest rates and allows cardholders to cancel their card and repay the balance at the existing interest rate if they so choose. Cardholders are also protected from retroactive rate hikes and arbitrary changes in contract terms by the credit card company.
The bill also protects cardholders from double cycle billing and allows cardholders who are being charged a higher interest rate because of a default to have their rate lowered back to the original rate if they make on time payments for six months in a row.
The bill also tightens regulations concerning the timeliness of credit card statements. Credit card companies must now mail statements out 21 days before payment is due. Due date tricks such as weekend billing dates are also regulated. Due dates that fall on the weekend are now moved to the next business day, Monday in most cases, Tuesday if that Monday falls on a holiday.
The act takes aim at over the limit fees, by requiring that card holders specifically allow or forbid purchases made over the credit card’s limit. The law also takes aim at sub-prime cards, requiring that cardholders issued sub-prime cards pay all fees related to that card up front.
Credit card companies must explain, in plain language, the credit card agreements policies regarding rates and fees, and must also provide card holders with estimates of how long it will take to pay off their balance if they only make minimum payments.
With regard to college students, the CARD Act prohibits people under the age of 21 from obtaining a credit card unless they have a co-signer on the account. Credit card companies are also forbidden to give away prizes on college campuses as a means to induce students to open accounts.
The law also increases penalties for credit card companies who fail to follow the law.
Unintended consequences
Like any other piece of legislation, the CARD Act has resulted in some unintended consequences, some of which have had a negative impact on American credit card holders. For example, in anticipation of the federal clampdown on some of their existing penalties and rate changes, some credit card companies have instituted rate hike provisions in their card agreements that the legislation does not forbid. For example, some credit card companies have imposed an inactivity fee, that would penalize card holders who don’t use their credit cards for more than 12 months. Many other credit card companies raised interest rates to mitigate the loss in profits the new regulations concerning fees would cause.