The Credit Card Accountability Responsibility and Disclosure Act (Credit Card Act of 2009) was signed into law by President Barack Obama on May 22, 2009 and is meant to protect consumers from financial industry practices which have historically lacked transparency and were not consumer friendly. It is hoped that the Credit Card Act of 2009 will help make credit card terms easier to understand. Congress’ mandate ordered that the provisions of the Credit Card Act of 2009 be implemented in three distinct phases. The first phase went into effect in the summer of 2009, the second phase in February of 2010 and the third phase is expected to be implemented on August 22, 2010. The Federal Reserve Board, in cooperation with other regulatory agencies, is required to develop rules that describe how the law will work in “real life.”
Under the first phase of the Credit Card Act of 2009, implemented in the summer of 2009, credit card issuers were required to provide customers with 45 days written notice before they make any significant changes to the consumer’s contract and must mail bills 21 days before the due date (previously, issuers were required to give 30-days notice before changing a contract and mail bills at least 14 days in advance). Consumers were also given the right to reject changes to their contracts, including interest rate increases, and given the option of paying off their credit card balances within five years using the existing rate.
The second phase went into effect in February of 2010. One of the major provisions of this phase was that card issuers can only raise interest rates on existing balances if:
- The consumer is 60 days or more past due
- A promotional rate expired
- The consumer does not complete a workout plan
- A variable rate increased because of movement in an index
Further, if the rate hike experienced by a consumer is the result of a late payment, the credit card issuer must reinstate the lower rate after the consumer makes on-time payments for six months. Additionally, young people must be at least 21 years old or get an adult to co-sign a credit card application with them if they want their own credit card.
The third and final phase of the Credit Card Act of 2009 will take effect in August of 2010. The proposed rules amend Regulation Z (The Truth in Lending) to protect consumers from unreasonable penalty fees and to require credit card issuers to reconsider increases in interest rates. The new rules are as follows:
- Reasonable Penalty Fees – The penalty fee for late charges or violating another account terms has been capped at $25 unless the consumer has engaged in repeated violations or the credit card company can show that the cost it incurred as a result of one’s late payments justified a higher fee. Additionally, the late payment fee, if any, levied on the consumer’s account cannot be higher than the consumer’s violation. For example, previously, a consumer who had been late making a $20 minimum payment could have been charged a $39 penalty fee. The third phase states that penalty fees cannot exceed the dollar amount of the consumer’s violation.
- Additional Fee Protections – The credit card companies can no longer charge inactivity fees because the account is not being used nor can the credit card company levy multiple fees for a single event or transaction that violates the cardholder agreement. For example, if you are late making a payment, you can only be charged one single late fee. Today, you can be charged over and over again for the same violation.
- Explanation of Rate Increase – If the credit card company increases the annual percentage rate (APR), it must explain why. Today, no such explanation is required.
- Re-evaluation of Recent Rate Increases – If a consumer’s APR was increased after January 1, 2009, the card company must re-evaluate such increase every six months and if appropriate, reduce the rate within 45 days of the evaluation. Today, credit card companies can increase the APR with no obligation to reevaluate the rate increase.
The following web page was released by the Federal Reserve Board to clarify the final set of provisions: What You Need to Know: New Credit Card Rules Effective Aug. 22 so if you need further clarification, you should look them up.
Consumer advocates for the most part favor the Credit Card Act of 2009. According to the Pew Charitable Trust, consumers will save at least $10 billion a year from curbs on interest rate increases alone. Unfortunately, the credit card companies have had several months in-between phases to prepare while certain rules were clarified by the Federal Reserve. During this time they have hiked interest rates, reinstated annual fees, and moved more consumers into variable rate cards (card companies are not required to give customers 45 days notice when rates are increased on variable cards, only fixed cards). Finding credit cards with great cash back offers or low interest rates will be much more difficult.
The third phase has addressed some of these “back-handed” new procedures implemented by the card companies. Consumers now have the comfort of knowing that late payments and other penalty fees must be assessed in a way that is fairer and generally less costly. However, there are exceptions for those who are chronically late making payments and such customers could still face higher fees as card companies are allowed to increase penalty fees if they represent a “reasonable proportion” of the costs it takes to clear up account violations. The $25 cap on late payment fees appears, in general, to be a good thing for consumers, as in the past there has been no industry standard on these fees. The ban on penalty fees above the dollar amount of the consumer’s violation will also result in savings for those consumers who incur a penalty for a small dollar violation.
The new rules also benefit those consumers who pay off their card balances, yet want to keep their accounts open, by banning card companies from charging inactivity fees; such fees are widespread and generate a great deal of revenue for card companies. Accordingly, one can pay off his/her balance without being “punished” by the card company.
Finally, an important measure of the third phase is that the Fed is requiring card issuers to reexamine rate hikes that have been imposed since Jan. 1, 2009, reconsider the reasons for the increases, and “if appropriate, reduce the rate.” This certainly benefits a consumer whose credit was damaged after January 1, 2009, yet has either rebuilt their credit or rectified the problem. A consumer will not be forced to pay for a mistake, through higher rates, that has been fixed or was not meant to be there in the first place.
There is no doubt that the Credit Card Act of 2009 coupled with the economic recession made it quite possible that credit card companies will experience a severe decline in revenue. Accordingly, the credit card companies feel it necessary to make up revenues in other areas and will continue to find “loopholes” to the new laws. The act does not, unfortunately, protect card users from everything. Although some consumers and card issuers feel that the impact will be to increase rates and limit the availability of credit, the Credit Card Act of 2009 does represent the most sweeping credit card reform legislation that Americans have ever seen. Its implementation, will for the most part, be considered a victory for Americans if they continue to read the fine print and stay abreast of the laws and their rights.