The Credit Card Accountability, Responsibility and Disclosure Act, known as the CARD Act, becomes law on Feb. 22, 2010, George Washington’s birthday. George Washington had a penchant for truth and the full title of the CARD Act is: “An Act to amend the Truth in Lending Act to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes.”
The purpose of the CARD Act is to ensure that borrowers with a poor credit score and a history of late payments get treated as fairly as borrowers who have kept their credit record clean.
Claims by credit card issuers that changes would lead to higher rates has been fulfilled. Many issuers raised their interest rates and fees since the President signed the CARD Act on May 22, 2009.
In desperate attempts to take advantage of their customers before the new laws kicked in, credit issuers raised minimum payments and lowered credit limits for customers with bad credit, and closed accounts of customers who do not use their cards often and good payers who pay their entire balance each month.
The act does not limit how high interest rates can go and does not apply to business or corporate credit cards.
The Act was passed to beat several consumer-unfriendly practices, including:
- prohibiting credit issuers from arbitrarily changing the terms of their contract with a cardholder, the practice of “any-time, any-reason repricing.”
- requiring a customer option of a fixed credit limit, and preventing the credit issuer from charging over-the-limit fees.
- requiring 45 days notice before raising a customer’s interest rate. The customer has three billing cycles to decline the new terms and pay off their balance at the old rate and payment schedule.
- prohibiting rate increases on existing balances for fixed rate accounts or for universal default, which is a late payment on an unrelated account.
- requiring the credit issuer to return customer to their previous interest rate after six consecutive months of timely payments.
- requiring a minimum of 21 days from the date the bill is sent out to the due date (increased from 14 days).
- requiring monthly due dates to be the same each month or next business day if a weekend or holiday.
- requiring payments to be accepted as timely when paid before 5pm EST on the due date or mailed at least 7 days before the due date.
- prohibiting the charging of additional fees for payment methods including online, mail, electronic transfer, or telephone. The exception is an expedited payment to avoid a late fee.
- requiring payments to be applied to the highest-rate debt on the account.
- prohibiting the charging of interest for payments made during a grace period.
- requiring credit card statements to contain a schedule of time required and interest paid to pay off balance with minimum payments, and how much the payment must be to pay the balance off in three years.
- requiring the customer agree to either a hard credit limit, or approval with an over-the-limit fee applied and limits the number of over-the-limit fees to three.
- requiring the up-front payment of all fees, before issuing of subprime cards, where fees will exceed 25 percent of the credit limit.
The CARD Act also prohibits issuance of credit cards to minors under the age of 21 without a co-signer unless they can prove they are able to repay. This will stop the issuing of cards to minors where parents are responsible for their debts until age 21.
Although the idea was to treat poor payers as fairly as good payers, the Act causes credit issuers to treat all borrowers the same. Credit issuers say they have no way of knowing who will lose their job, get sick or other financial situation that will cause payment default, so they will treat everyone the same. They believe the past does not guarantee the future.
Credit issuers are continuing their research into ways they can apply fees that are not covered in the CARD Act. Fixed-rate cards could be switched to variable rates that give the issuer more flexibility. Card issuers may increase transaction fees to retailers, causing them to stop accepting those cards or raise prices.
Congress is working on more transparency and oversight of the credit issuers, requiring reports on company profits, fees and rates that will be presented to Congress each year.
Banks are now focusing on increasing profits from debit cards, since credit has now been limited. The best course is to use cash when possible and ask for a discount equal to the Merchant fee.
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