The Credit Card Accountability Responsibility and Disclosure Act (or Credit CARD Act) was passed by the United States Congress in 2009, expanding on the Truth in Lending Act, and took effect in 2010. Its purpose was to curtail deceptive and abusive practices by credit card issuers.
A new Federal agency, the Consumer Financial Protection Bureau (CFPB) was created to (among other things) administer the Credit CARD Act.
The Credit CARD Act was passed by lawmakers in response to the following practices:
Interest rate hikes: Many credit card companies hiked the interest rate on their cards without adequate notification or reason. Most customers didn't realize this was happening and often were powerless to do anything about it.
Marketing targeted toward underage consumers: Many credit card companies targeted college campuses with giveaways to underage consumers who were not aware of what they were signing up for until it was too late. ("Hey, all you need to do is fill out an application – you never have to use the card once you get it.")
Fees: Numerous credit card accounts were hit with all manner of fees, often undisclosed. These ranged from late fees to "over-limit" fees, which were assessed when the credit card company allowed an account to go over its limit and then charged the customer a fee for doing so. (These became known as "fee harvester" cards.)
Obfuscation: Most of the time, it was nearly impossible to decipher the myriad charges, fees and interest expenses added to a credit card account.
Credit CARD Act Summary
Title I - Consumer protection against increases in fees and interest rates, as well as unclear and unduly short notifications about changes. Credit card companies are now required to take into consideration new applicants' "ability to pay" before approving that applicant for new cards.
Title II - Enhanced disclosures about payoff timing, penalties and renewals, as well as prevention of deceptive marketing of credit reports.
Title III - Protection of young consumers from prescreened credit offers, as well as limits on extensions of credit to underage consumers, renewal disclosures and college credit card agreements.
Title IV – Prepaids. Specific legislation governing prepaid and gift cards, as well as gift certificates.
Two categories of so-called deceptive practices received particular attention:
Several components of the Act addressed underage applicants in general and college students in particular.
Campus marketing: Credit card marketing teams can no longer appear on college campuses to offer giveaways in order to solicit credit card applications. This applies to off-campus college-sponsored events, too.
Mailing offers: The Credit CARD Act also prohibits credit card companies from mailing offers to prospective customers under the age of 21, unless they specifically "opt in" to receive those materials.
Ability to pay: Credit card companies have to consider an applicant's ability to repay before approving a new credit card, curtailing the practice of issuing cards in order to collect late fees and other charges (and, of course, targeting students). The act also restricts fees on low-balance cards sold to cardholders with bad credit.
Underage cardholders: The Credit CARD Act prohibits lenders from issuing new credit cards to Americans under the age of 21 unless that applicant finds an adult co-signer capable of paying off a new credit line. Also included is a provision that credit bureaus can no longer supply reports on Americans under age 21 without parental consent.
The Act contains several provisions limiting abuses by issuers of prepaid and gift cards.
Fees: All fees must be spelled out clearly for prospective buyers before they purchase a gift or prepaid card regardless of whether the purchase is completed in person, over the internet or over the phone. In addition, the card or certificate itself must clearly state that a fee may be charged, the amount of the fee and how often it may be assessed, and that a fee may be charged for inactivity. (This does not apply to gift certificates for which no money or other value has been exchanged nor to certificates that are issued as part of an award, loyalty or promotional program.)
When fees are charged, no more than one fee per month may be charged.
Expiration date: Under no circumstances may the cards expire sooner than five years after (1) the issuance of the gift certificate or card, or (2) the date funds were last loaded to a store gift card or general-use prepaid card.
If a card is subject to an expiration date, the terms of expiration must be clearly and conspicuously stated before issuance. The Act also prohibits imposing fees to replace an expired certificate or card if the underlying funds remain valid to ensure that consumers have full use of the underlying funds for the minimum five-year period.
A few of the practical protections afforded consumers by the Credit CARD Act include:
Changes: Under the Credit CARD Act, banks may only change interest on existing balances if you are 60 days or more late on your monthly minimum payment. In addition, after you make six months of on-time payments, they must restore your original rate.
Third-party credit reporting: Credit card issuers are no longer allowed to impose penalty rates and fees when a third-party credit bureau reports a default with another lender, including other credit cards.
Promotional terms: The Credit CARD Act requires promotional rate periods to last at least six months and, with very few exceptions, forbids changes to the purchase rate of any new accounts within the first year.
Adequate time: The Credit CARD Act mandates that statements be mailed or posted online no later than 21 days before an account's due date. Credit card companies cannot "trap" consumers by setting payment deadlines on the weekend or in the middle of the day or changing their payment due dates each month.
Interest cycle: Lenders must calculate interest based only on the balance during a single payment cycle.
Payment rules: Credit card companies must apply payments to a consumer's highest interest rate balances first.
Over-limit charges: Credit card customers now have to be given the choice whether to "opt in" to over-limit charges on their credit card account. If they decline to opt in, they will have their cards declined when a proposed charge or withdrawal would put the balance over the limit, and no fees may be charged in connection with that purchase attempt.
Readability: Instead of "mice type" legal text printed along the sides or bottoms of account materials, banks must now use clear language in an easily readable font to explain products and services.
Financial Consequences: Congress challenged credit card issuers to educate consumers by including information about the impact of long-term debt in every account statement. Banks must now calculate how long customers could stay in debt by paying only minimum payments.
In all, the Credit CARD Act set out to curtail deceptive and abusive practices by making the most egregious practices unlawful and by setting out clear provisions for disclosure.
New Statement Requirements
In compliance with the Credit CARD Act, issuers had to improve upon the readability of their credit card statements while also adding information that could prove vital for cardholders.
Before the changes necessitated by the Act, you probably received your statement in the mail, lamented over its clunky, unapproachable design, spent a couple of seconds locating the minimum payment due and disregarded the rest. But with a more streamlined and uniform design, a few extra minutes going through your credit card statement can go a long way to making you better educated about your full credit card situation.
Aside from straightforward information such as a summary of your account activity and that month’s transactions, here are a few key additions thanks to the Credit CARD Act:
- Issuers have to warn cardholders of any penalties they can incur from late payments as well as the potential long-term cost of making only minimum payments on their balances.
- Cardholders must be notified of any changes to their interest rates at least 45 days before the rate changes.
- Interest and fees have to be listed separately from transactions.
In the Credit CARD Act, the Consumer Financial Protection Bureau (CFPB) was created to be a watchdog responsible for monitoring compliance and responding to consumer complaints. According to one of its reports "over-limit fees and re-pricing actions have been largely eliminated; those effects can be directly traced to the Act. The dollar amount of late fees is down as well, and the CARD Act directly caused this reduction... Limitations on 'back-end' fees, along with restrictions on an issuer’s ability to raise interest rates, have simplified a consumer’s cost calculations. Credit card costs are now more closely related to the clearly disclosed annual fees and interest rates..."
As one example of the effectiveness of the Act, the CFPB estimates that the average late fee went down by $6 (from $33 to $27, a savings of 18 percent), leading to a $1.5 billion reduction in the amount of fees paid by cardholders in 2012.
In addition, the CFPB created a database of all credit card agreements, which it maintains here for anyone to refer to in the event they misplaced their agreement.
Two categories targeted for abusive practices were highlighted above. Here is a brief review of how the Act has impacted those groups.
In a review, the CFPB found that marketing partnerships between institutes of higher education and financial institutions have shifted from credit cards toward debit cards, which were specifically excluded from the Act’s provisions, and prepaid cards since the implementation of the Credit CARD Act. There are now more college debit and prepaid card agreements than credit card agreements. As of 2013, the Government Accountability Office (GAO) reported that at least 852 schools had agreements covering the provision of debit or prepaid card services to their students.
In addition, it found that almost 80 percent of reporting colleges did not disclose that they were receiving money from card issuing institutions, as required.
For the most part, the Act has resulted in better disclosure of fees and expiration terms than before.
As can be expected, however, there still are a number of issues which have come to light.
The CFPB has targeted a few more issues of abuse that remain.
Add-on products: Credit card issuers market various “add-on” products to card users, including debt protection, identity theft protection, credit score monitoring and other products supplementary to the actual extension of credit. The Bureau has found through its supervisory work that these products are frequently sold in a manner that harms consumers.
Fee harvester cards: Some card issuers charge upfront fees that exceed 25 percent of a card’s initial credit limit, but those practices have been found to be excluded from the CARD Act because a portion of the fees are paid prior to account opening, e.g. so-called application fees.
Deferred interest products: In the private label credit card market, it is common to offer promotional financing for purchases. These offers retroactively assess and charge interest if the balance is not paid in full by a specific date. The evidence gathered by the Bureau indicates that for borrowers with subprime credit scores, about 43 percent are ultimately charged retroactive interest in a lump sum.
Prepaids: There are still no requirements for easy and free access to account information, fraud and lost-card protection, or error resolution rights.
Debit cards: Industry lobbying during the fight over the bill resulted in carve-outs for bank-issued debit cards and prepaid debit cards, which continue to have minimal consumer protections.