New credit card provisions

Tuesday, July 21, 2009

The Credit Card Accountability Responsibility and Disclosure (C.A.R.D.) Act of 2009 will provide many protections from abusive credit card practices. Unless otherwise noted, these provisions are effective Feb. 22, 2010. (Click here to read the legislation as adopted.)

UPDATE: The Federal Reserve issued final rules on the CARD Act on Jan 12, 2010. Click here to read the Federal Reserve's educational fact sheet for consumers.

New accounts

Creditors generally cannot raise interest rates, or any fees, during the first year after an account is opened, except:

• When the increase is due to a variable indexed interest rate. (Notice of incremental changes is not required.)
• At the end of a promotional rate period, provided that proper advance disclosures are provided and that the promotional period lasts at least six months. (No notice required when introductory rate expires.)
• If the required minimum payment is not received within 60 days after the due date. The consumer must be given 45 days advance notice and an option to cancel (as described below) as well as the reason of the increase. The notice must explain that the rate increase will terminate within six months if the creditor receives all minimum payments on time during that period.

Notice of future interest rate increases

After the first year, the card issuer can raise the interest rate on future purchases (those made subsequent to the rate increase becoming effective), or make other “significant” changes in terms with 45 days advance notice. The notice shall advise the consumer of the right to cancel the account. No notice is required for changes to variable and promotional interest rates as set forth above. (The 45-day notice requirement and right to cancel are effective on Aug. 20, 2009—however the prohibition on changes in the first year does not take effect until Feb. 22, 2010.)

Interest rate increases on existing balances

Even after the first year of an account’s opening, credit card issuers cannot raise interest rates on existing balances, except:

• When the increase is due to a variable indexed interest rate. (Notice of incremental changes is not required.)
• At the end of the promotional rate period, provided that proper up-front notice was given and that the promotional period is at least six months. (No notice required when introductory rate expires.)
• If the required minimum payment is not received within 60 days after the due date. The consumer must be given 45 days advance notice and option to cancel as described below as well as given notice for the reason for the interest rate increase and told that the interest rate increase will terminate within six months if the creditor receives the minimum payments on time during that period.

Repayment of outstanding balance

Although creditors can change terms on outstanding and future balances as described above, the creditor’s notice of the change in terms must explain that the consumer can cancel the account before the effective date of any change.

If the account is closed or cancelled by the consumer, the closed account will not be considered a default under the cardholder agreement and the creditor cannot require immediate repayment of the entire balance.

In addition the creditor must either:

• Structure the balance to be paid over at least five years; or
• Require a minimum monthly payment equal to a percentage of the balance that is no more than twice the percentage required for the old minimum payment. (Effective date: Aug. 20, 2009)

Limits on fees and penalties

No over-limit fees may be charged unless the cardholder has given permission for transactions that exceed his or her credit limit.

An over-limit fee may be imposed only once per any billing cycle in which the balance is over the credit limit.

No fees can be charged to make a payment online, via telephone, by mail, or by other means, except for an expedited payment arranged live through a service representative.

A card issuer who increases the interest rate because of factors related to market conditions or credit risk must review the account every six months and decrease the rate if indicated by the review. The amount of the required rate decrease has not been specified. The Federal Reserve Board must issue rules regarding compliance with this requirement.

Penalty fees (late fees, over-limit fees, etc.) must be reasonable and proportional to the omission or violation of the card agreement. The Federal Reserve Board must issue rules to determine what fees are reasonable.

Double cycle billing

Double cycle billing is generally prohibited. A creditor cannot reach back to the previous billing period when calculating the amount of interest charged in the current cycle.

Ability to pay

Credit card issuers must consider the consumer’s ability to make the required payments before opening a new account or raising a consumer’s credit limit.

Application of payments (payment allocation)

Amounts in excess of the minimum payment must be applied to the balance with the highest interest rate, except during the last two billing statements before a deferred interest balance is due, where excess payments must be applied to the deferred balance.

Payment due dates

Credit card issuers must mail the billing statement (or deliver it electronically) at least 21 days before the due date. (Effective date: Aug. 20, 2009)

If there is a grace period, the grace period must extend for at least a 21-day period after a statement is mailed. (Effective date: Aug. 20, 2009)

Credit card issuers must credit all payments received by 5 p.m. on that day.

Due dates must be on the same day each month, (i.e., the 1st of each month).

If the payment due date falls on non-business days, such as weekends or holidays, then the creditor cannot consider payments received on the next following business day to be late.

If a creditor accepts payments at local branches, the date a payment is made at the branch will be considered the date the payment is posted.

Increased disclosures

Creditors must disclose on the billing statement the period of time and total interest it will take to pay off a card balance if only minimum monthly payments are made, the monthly payment amount that would be required to pay off the card balance in 36 months and a toll free number for the consumer to call for credit counseling and debt management services.

Periodic statements must clearly and conspicuously disclose the required due date, late payment fee and late payment penalty rate if any.

Credit card agreements will be posted on the issuers’ websites for the benefit of cardholders. These agreements will also be publicly available on the Federal Reserve Board’s website.

Young consumers

Before issuing a card to a person under 21, the issuer must obtain an application, which contains either:

• The signature of a co-signer over 21 who will be jointly liable for debts incurred before the consumer reaches 21; or
• Information indicating an independent means of repaying extensions of credit on the card.

No prescreened card offers can be made to persons under 21 unless they have consented to receive such offers.

Card issuers may not raise the credit limit on accounts held by a college student under 21 and a co-signer without written permission from the co-signer.

Card issuers cannot provide tangible gifts (having monetary value) to college students on or near campus, or at campus-sponsored events, in exchange for applying for credit.

Colleges must publicly disclose all marketing contracts made with credit card companies.

All card issuers must also submit an annual report to the Federal Reserve Board including the terms and conditions of all promotional agreements with colleges, including the number of accounts opened during the time period. These reports will be the basis of a report by the Federal Reserve Board to be given to Congress and the public.

Credit reports

Advertisements for free credit reports must state that free credit reports are available under federal law at AnnualCreditReport.com.

Subprime cards (‘fee harvester’ cards)

Where fees take up more than 25% of an available credit line, they cannot be deducted from the available line. For instance, a credit card has a limit of $200, and fees total $51, or over 25% of the available balance. A creditor cannot reduce the available balance by $51 to get its fees.

Click here to download an easy-to-print version of this fact sheet.