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Credit Card Rules and the CARD Act

In response to growing concerns about potential abuses within the credit card industry, Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (also known as the Credit CARD Act), which ushered in a number of new rules providing a variety of protections for credit card holders and applicants.

Protections Offered by the Credit CARD Act

Consumers shopping for credit cards and existing cardholders may be interested in a number of key changes instituted by the CARD Act. The new laws provide a number of protections for consumers, primarily in the areas of interest charges and credit card fees, as well as interest rate increases. Here is a brief breakdown of many portions of the law.

Annual Percentage Rate (APR) Increases:

Credit card issuers are not allowed to raise APR's on existing balances within 1 year of an account being opened with four exceptions:

    1) A bank disclosed that they would raise the APR earlier, when the account was opened;

    2) the APR is increased due to a change in one of the "indexes" beyond the issuer's control;

    3) a consumer fails to abide by a "workout" arrangement with the issuer (workouts are sometimes offered to consumers struggling with payments, temporarily giving them a lower APR or similar benefit);

    4) the credit card holder fails to make required minimum payments within 60 days.

After 1 year from when the account was opened, credit card companies are allowed to raise APR's. However, the increased APR will apply only to new transactions and the new rate must have previously been disclosed to the consumer.

Notice and Disclosure Requirements:

The CARD Act also implemented new and improved notice requirements for issuers, plus a few key required disclosures:

  • Advance notice of rate increases and important changes - credit card companies are required to give 45 days notice of changes to the APR or of any other significant changes to terms and conditions of consumers' credit card agreement. Examples include include increases in fees or finance charges.
  • Notice of changes to the agreement must include notice of the right to cancel - When cardholders get any notice of changes, such as those outlined above or other significant changes to their cardholder terms, they must be given 45 days to cancel the agreement. If they choose to cancel, this can't be deemed a default by the issuer. The credit card company also can't force cardholders to pay off their entire balance upon cancelation.
  • Disclosure of Total Time Required to Pay down debt - statements now must show the monthly payment amount required to pay off the existing balance in 36 months, including both payments and interest. Related to this, a statement must also warn about the cost of making only the minimum required payment.
  • Disclosure of due dates and fees - statements must prominently display the due date for the next payment, plus any potential fees for late payment and when they would apply.
  • Notice of Penalty APR - If a cardholder agreement includes an increase to the interest rate on the account in the event of late payment, this notice has to be included in statements, including the penalty interest rate.
  • Disclosure of How Much Interest/Principal is Paid - statements must also display how much a cardholder has paid in interest and fees during the current year.

Late Payments

The CARD Act has also established new and increased protections for consumers to receive monthly statements. Under the new rules, a payment can't be considered late unless the statement was mailed or delivered to the customer at least 21 days prior to the due date.

Handling of Payments

Credit card companies are now required to abide by certain rules regarding how to handle payments made on an account. One of the most important changes is that for customers who have multiple APR's applying to different types of debt (for example, balance transfers and cash withdrawals) credit card companies must now apply those consumers' payments to debt in the order of highest APR first. No longer can companies apply payments to debts with lower APR, while leaving debts with higher APR to accrue interest charges.

Double or two-cycle billing is now prohibited. Double-cycle billing occurs during the calculation of interest charges for a month. The issuer would include the current balance on the credit card but also add the average daily balance from the previous billing period, regardless of whether some of the previous balance was paid.

Universal Default

The practice whereby creditors raise consumers' interest rates based on their payment records with other creditors has been cut back, if not eliminated altogether. Credit card companies are no longer allowed to raise interest rates on existing balances based in this manner, and can only raise the APR on future balances if they give 45 days' notice.

Above are many, but not all, of the protections offered by the sweeping provisions of the Credit CARD Act. If you are concerned about your credit card issuer's practices, the terms of your cardholder agreement, or have other concerns related to debt in general, you may wish to contact a local consumer debt attorney in your area.

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