The Obama Administration really pressed for some major changes to the credit card industry, and it was about time. I understand the credit card companies are in the business of making money, but many of their business practices are unethical at best and borderline illegal at worst. OK, maybe they aren’t illegal, but that is only because they invent new methods of charging their customers that haven’t been covered by the law books.
Don’t get me wrong, I’m not against using credit cards. I use them and recommend using them – as long as they are paid off in full each month. The benefits of using credit cards are well documented, and when used properly, they are not harmful. The problem with credit cards are when customers carry a balance, or when card companies assess late fees unfairly.
Below I have listed the details of what the Credit CARD Act of 2009 Entailed:
Credit CARD Act of 2009 – Phase 1:
The first phase of the Credit CARD Act, which went into effect on August 22, 2009, required credit card companies to give a 45-day advance notice to cardholders before making any significant changes to the account holder’s terms and conditions or interest rates.
The 45-day advance notice applied to increases in interest rates, certain fee changes (annual fees, cash advance fees, and late fees), or make other significant changes to the terms of your card.
The 45-day notice for rate increases does not apply to variable interest rates, expiring introductory rates, rates that are tied to an index, or when the card holder breaks previously agreed to terms (such as a payment plan).
It also required credit card companies to mail statements no later than 21 days before the due date (the previous requirement was 14 days).
Credit CARD Act of 2009 – Phase 2:
The second phase went into action on Feb 22, 2010. Here are some of the ways the second phase of the Credit CARD Act affected consumers and credit card users:
Interest Rate Increases:
- Credit card issuers cannot increase interest rates within the first 12 months of the account being opened (unless consumer makes late payments).
- Introductory promotional rates must remain in effect for at least 6 months (great news for people who take advantage of 0% Balance Transfers).
- Credit card issuers will not be able to raise an interest rate on an existing balance unless the cardholder goes 60 days past due on the account.
- Increased interest rates only apply to new charges and cannot be made retroactively.
- No universal default clauses.
Credit Card Fee Restrictions:
- Over Limit Fees. Card holders must give consent to allow card issuers to process over the limit transactions. Even with consent, only one over limit fee is allowed per billing cycle.
- Payment Processing Fees. Credit card issuers will no longer be allowed to charge payment processing fees for accepting payments via mail, phone, or online, but will be allowed to charge fees for expedited payment processing.
- Payment Due Date. Payments will not be considered late if they are received by 5pm on the due date, including weekends and holidays; payments made at a local branch or office must be credited the same day. (credit card companies could previously set the time payments must be received, often making the cutoff in the morning of the due date to increase the number of late payments and the fees they could charge).
- Annual Fee and Non-Penalty Fee Limits. Non-penalty fees cannot exceed more than 25% of the credit limit when the account is opened. For example, many secured credit cards currently come with annual fees almost as high as the credit limit.
Student Credit Cards:
- Consumers between the ages of 18-21 will need to provide proof of income or have a co-signer before they can be approved for a student credit card.
Billing and Payment Allocation:
- Payments must automatically be applied to the highest interest balance first. This is great for consumers who open a new credit card for a favorable interest rate, such as a 0% Balance Transfer card.
- Credit card statements need to include a minimum payment disclosure that details how long it will take to pay off the current balance and how much interest will be paid over the life of the loan. These numbers must be given for both minimum payments and the payment need to pay the card off in 3 years.
- Double-cycle billing will no longer be permitted (double-cycle billing calculates the average monthly balance over two months).
- Credit card issuers must make account terms and cardholder agreements available online.
Credit CARD Act of 2009 – Phase 3:
The third phase of the Credit CARD Act went into effect on August 22, 2010 and had provisions for reinstating lower interest rates if card holders continue to make on time payments for 6 months, and there were new rules for gift cards, limiting the fees and prohibiting the expiration of them for the first 5 years.
Things that Didn’t Change About the Credit Card Industry:
- Interest rates were not capped
- This did not prevent credit card companies from inventing new ways to add charges or bill customers
Here is a copy of the Credit CARD Act of 2009 (Engrossed Amendment as Agreed to by Senate).
The Responsibility Belongs to the Credit Card User
I think these changes are great. The credit card companies have too much control over fees and rates, and the system is overly complicated. Standardization in the industry has helped consumers better understand the system, and ultimately helped the industry save money in other areas, such as customer support and billing.
But ultimately, the responsibility falls on the user. Card holders sign the credit card agreement and should know and understand the contents, even if it is a 63-Page Credit Card Agreement. The key to successfully using credit cards is to pay the balance in full every month, on time, every time.
New Credit Card Statements
Perhaps the most visible change brought about by the Credit CARD Act is the new statements. Credit card companies are now required to inform cardholders how long it will take them to pay off their bill when making minimum payments and what their payment will need to be in order to pay off their loan within 3 years (and how much money they will save in interest if they pay off their card in 3 years). This is an example of the new American Express credit card statement.
Credit Card Companies Respond
One of the big fears many people had about the Credit CARD Act was that there would be negative reactions in the industry and that many credit card companies would drastically reduce the amount of credit they offered, make it too difficult for people to obtain credit cards, or hike interest rates. There were some credit card companies that raised interest rates before the new laws took effect, which prompted Congress to implement some Credit Card Act changes earlier than anticipated.
However, it seems that most companies have responded well to the Credit CARD Act changes and have made it a goal to educate their consumers about the new changes. Almost every major credit card company clearly labels the new rules on their website and some even show graphics regarding how to read the new statements required by the Credit CARD Act.
The Citi website has a list of new changes and explains how the new rules will affect cardholders. The Citi site clearly states how to read the new credit card statements, standardized information about payment due dates, and information about how and when your payment is applied to your balance
What To Do If Your Credit Card Company Changes Your Terms
If your credit card company makes a change to your terms, you have the option to accept or decline the changes. However, if you decline the new offer, the credit card company will then close your credit card and you will no longer be able to make new charges with it. You will also still owe them the remaining balance on your card, at the same terms you had when the account was closed.
Closing credit cards can affect your credit score. You need to be careful about closing credit cards though, because it can possibly cause a decrease in your credit score because it lowers your average age of credit as well as your available credit – two important factors in determining your FICO credit score.
If you are trying to keep your credit score up, then you may find it is better to accept the new terms and either deal with the higher interest rates or apply for a 0% balance transfer credit card to move your credit card balance to a new card with no interest.
What are Your Thoughts on the Credit CARD Act?
Overall, I think these changes helped clean up the industry and make it easier for consumers to know where they stand. Which benefit those people who carry a balance on their credit cards, and will likely end up hurting people who like to take advantage of rewards credit cards. Even though I am in the latter category, I support most of these changes.