Most consumers have never heard of the Credit Card Accountability Responsibility and Disclosure Act (CARD Act), even though it impacts everyone who uses credit cards or carries credit card debt. Legislation was signed into law in 2009 during the financial crisis and most of the provisions went into effect by February 2010.
Practices that were once common but are now banned include arbitrary cut off times before 5 pm on the due date, changing due dates each month, raising rates on existing balances without a default and only providing a 14 day grace period from the bill date to the due date.
Studies have shown that these consumer protections are saving customers billions of dollars each year from reduced fees, reduced interest rates and more favorable terms. A number of provisions directly impact the majority of consumers. So, we have highlighted their impact on your wallet.
They include the following 10 key changes.
1) Regulated late fees saves consumers millions of dollars each year. The new requirements have provided greater consistency with fees that are more directly tied to associated costs. The results have been lower fees for consumers even though minimum payments have risen. Issuers are still allowed to charge a late fee if a payment is one day late. They are also allowed to charge a default rate if there are 2 missed payments or being 60 days late. However, after 6 months of on time payments, the original rate must be re-instated providing relief once the account is caught up.
2) Regulated interest rates reduces the total amount of interest consumers are paying. This has major implications as increased rates only apply to new purchases rather than being retroactively applied to existing balances, saving hundreds of dollars in higher interest charges. The other major change is that payments beyond the minimum due must be credited to the highest interest rate on the account. Banks had gotten away with putting all payments towards the lowest interest rates, meaning you were paying a lot more than necessary on outstanding balances. So long as you can make more than the minimum, payments will reduce your highest cost interest first, saving you money.
3) Over-The-Limit-Fee removed. Unless you choose to opt-in, the card issuer can no longer charge you an over-the-limit fee. Banks were quick to say they were doing you a favor by approving transactions that were beyond your credit limit, while charging a fee for each purchase. The elimination of this convenience does result in more consumers seeing purchases declined. But, you are no longer paying $30 to $40 for every over-the-limit transaction.
4) Marketing restrictions for the college market has resulted in college students having more difficulty establishing credit. The new rules require students to prove they are able to pay the debt back, rather than an automatic approval just because they are students. College students have adapted by moving to pre-paid debit and credit cards which are not covered under the CARD Act. Banks have also changed marketing tactics and moved marketing campaigns to social media and the internet, which is not regulated under the Act.
5) Less confusing statements is one of the most noticeable change for consumers. Statements are now required to show the total cost of borrowing if only the minimum payments are made as well as the total costs if you pay off the debt in three years. Fees and interest must be clearly stated. This has made it so it is easier to determine what you owe. With 34% of consumers only making minimum payments on credit cards, it is valuable to recognize the long term consequences of carrying debt. It can take 30 years of minimum payments to pay off debt. That’s the same period of time to pay off a mortgage.
6) Secured credit card regulations impact those with poor or no credit the most. The Act recognizes the necessity of having credit in this country and protects the most vulnerable consumers. It doesn’t matter if you are a college student, an immigrant, or have had a string a financial missteps requiring the re-establishment of credit. These provisions reduce fees companies can assess. Consumers can now get a card without losing most of the available credit to fees.
7) Removal of the universal default. This was death to consumers who were struggling. You make one late payment on one card and every other card could charge you a higher interest rate, making it nearly impossible to recover. Much to the relief of millions, you can now only be charged the default rate if you are late on that particular card. This at least gives you a fighting chance of getting back on track. If you get behind, banks can still charge late fees and you will trigger the default rate with 2 missed payments. At this point, getting professional help may be the best course of action for getting the debt paid off as late fees and getting behind on payments is still very difficult from which to recover. Banks are still allowed to reduce credit limits if they feel the risk has increased, which will also impact your credit score.
8) Restriction when selling add-ons. Consumer complaints were finally heard regarding practices that included signing customers up for products and services with little value to the customer, often without their knowledge. If you didn’t watch your statement closely you could find additional services added to your account. Banks are no longer allowed to do this which saves you money because you didn’t even notice you were being charged.
9) Restrictions on gift card fees. The gift card market is growing rapidly and was in desperate need of reform. No longer do cards expire quickly or have monthly fees that eat up the balance. Cards must now be good for at least 5 years and most no longer have any charges at all. Banks still make heavy profits off gift cards as many go unused and those that are used generally result in purchases that are larger than the gift card amount. Everyone wins with these new restrictions.
10) Housewives Exception came about because of the proof of “ability to repay” requirement made it so stay at home parents could not have their own credit. This was seen as particularly detrimental for those in abusive relationships and resulted in changes to the original Act. Now applicants are allowed to use “household” income rather than “individual” income to qualify for credit.
The CARD Act did not address the areas of pre-paid debit and credit cards, which has ballooned due to the restrictions on credit card applicants in the college market. These cards can still come with high fees. It also does not address credit extended to small businesses.
The CARD Act changes have not altered how we use credit and has not done anything to reduce the amount of debt that consumers carry. It has, however, provided more fair practices that benefit all credit consumers. When you are ready to shed your debt, these new rules are particularly helpful allowing you to pay highest balances first and reduce fees as you get debt under control.