The Credit Card Act: More Protection for Cardholders

The credit card law of 2009 provides more rules to protect credit cardholders.

The Credit Card Accountability and Disclosure Act of 2009 (also called the Credit CARD Act) provides protections to credit cardholders by limiting interest rate hikes, providing more disclosures in plain language, eliminating some unfair billing practices, and limiting the availability of cards to consumers under the age of 21.

Most of the changes took effect in 2010; some of those rules were revised in 2011. Here are some highlights of the federal credit card bill.

Which Credit Cards Are Covered by the CARD Act?

The CARD Act applies to all credit card accounts, except:

  • those used for business
  • consumer credit exceeding $53,000 (this amount is adjusted annually for inflation)
  • those secured by real property, and  
  • debit cards.

Limits on Interest Rate Increases

In the past, credit card issuers could increase the annual percentage rate (APR) on a credit card at any time, with minimal advance notice to consumers. The new Credit CARD Act places restrictions on APR rate hikes. (The APR is the cost of credit expressed as a yearly rate, including interest and other charges.)

Note: The new credit card law does not put a cap on the APR that banks can charge. This means that it's still important to shop for a card with the best terms for you and to use your cards wisely. (For information about choosing a credit card, see Nolo's article Shopping for Credit Cards, and to learn how to manage credit card debt, see Nolo's article Avoiding Credit Card Debt.)

No APR Rate Hikes in First Year

Card issuers are banned from increasing the APR rate on a new card for one year. There are four exceptions to this rule:

  • The bank discloses at the time the account is opened that the APR will increase sooner. (This exception addresses "teaser" rates -- low introductory rates intended to entice the consumer to get a new card. The initial rate, and how long it will last, must be clearly disclosed and the teaser rate must last at least six months.)
  • The card has a variable rate based on an index that the creditor doesn't control.
  • You fail to comply with a workout or temporary hardship arrangement agreed to by the card issuer, or the workout or temporary arrangement ends.
  • Your payment is more than 60 days late.
  • Your active duty in the military ends (special rates apply to those on active duty in the military).

No Retroactive Fee Increases After the First Year

If the card issuer raises the APR rate after a year, the new rate can only apply to new transactions.

Advance Notice of Rate Hikes or Term Changes

For the most part, if the card issuer changes the interest rate (in accordance with the new restrictions) or account terms, it must provide the consumer with notice at least 45 days in advance. Previously, the card issuer only had to provide 15 days' notice.  

If the company is increasing your rate because of your delinquency or default, it must list the reasons for the increased rate.

More Time to Pay Bills

Card issuers must mail or deliver statements at least 21 days before payment is due. If the card has a grace period, the monthly billing statement must be sent at least 21 days before the grace period ends.

In addition, credit card payments must be due on the same date each month. Deadlines that fall on a weekend or holiday are due the next business day. Card issuers can no longer set early morning deadlines for the payment day - instead they are required to post any payment received by 5 p.m. on the due date.

Restrictions on Certain Billing Practices and Fees

The Credit CARD Act limits or bans several billing practices and fees commonly used by the credit card companies.

Rules on Applying Payments to Multiple Interest Rate Cards

Some consumers have different interest rates for different balances -- a low rate for a transferred balance and a higher rate on new purchases, for example. In most cases, if a consumer makes a payment that is larger than the minimum amount due, the new law requires the card issuer to apply the excess portion to the balance that carries a higher interest rate.

No "Double-Cycle" Billing

Double-cycle billing (also called two-cycle billing) happens when a credit card company calculates interest charges on the current balance by factoring in the average daily balance from the previous billing cycle -- even if a portion of that previous balance was paid. The new credit card law bans this practice.  

Limits on "Over the Credit Limit" Fees

Credit card companies cannot charge fees for purchases that put the account over its credit limit, unless you agree to allow the company to process over-the-limit transactions. If you do not opt in, transactions that put your account over the limit will be rejected, and you will avoid fees.  

Better Disclosure of Terms

Card issuers must provide clearer disclosures of account terms and costs. The idea is to arm consumers with information so that they can make better choices as to what cards work for them and avoid costly fees and interest charges.

Disclosures on Monthly Statements

The new law requires monthly credit card statements to:

  • include a box showing cardholders how much interest and fees they have paid in the current year
  • show the due date for the next payment (and the fee for late payment)
  • display how long it will take to pay off the existing balance (and the total cost of interest) if the consumer makes only the minimum payment due, and
  • show the monthly payment required (and the total cost of interest) if the consumer were to pay off the balance within 36 months.

Internet Access to Credit Card Contracts

Credit card issuers must post their standard credit card agreement on the Internet. This will make it easier for consumers to compare and understand credit card account terms.

Protections for Young Cardholders

The new credit card law includes provisions that are meant to protect young people from racking up credit card debt.

Restrictions on Cards for Minors

Credit card companies cannot issue a credit card to anyone under the age of 21 unless: (1) the applicant has a co-signer, or (2) the young person provides proof of sufficient income to repay the credit card debt.

Marketing Restrictions

Card issuers cannot send pre-screened cards to consumers under the age of 21, unless the consumer agrees to receive the offers. Credit card companies must also stay a certain distance away from college campuses if they are offering free food or gifts to potential customers.

Beware of New Creative Credit Card Fees

The credit card industry has responded to the Credit CARD Act by coming up with ways to increase fees using tactics that aren't covered under the new law. According to a report by the Center for Responsible Lending, some credit card companies have:

  • imposed a "floor" on variable rate cards, so that increases have no limit, but decreases cannot go below a certain number
  • imposed minimum finance charges (which can be higher than the actual calculated interest)
  • charged inactivity fees to cardholders that don't use their card regularly
  • increased foreign transaction fees, and
  • increased fees for balance transfers and cash advances.

As always, be sure to read the fine print of all new credit card offers and any change of term notices your credit card issuer sends you.

For more details on the Credit CARD Act and information on finances, debt, and how to regain financial health, you may want to get Nolo's book Solve Your Money Troubles: Debt, Credit & Bankruptcy, by Robin Leonard and attorney Margaret Reiter.

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