Last Monday the final provisions of Credit Card Accountability Responsibility and Disclosure Act of 2009 took effect. The Credit CARD Act was designed to prevent unfair rate increases, limit fees, increase accountability and contract transparency, while protecting younger adults from assuming debts they can’t handle. The law mandates that:
- Contract terms must be clearly spelled out. Credit card agreements must now be posted on the Internet.
- For the first year that a fixed rate credit card is open, interest rates cannot be increased unless a borrower is more than sixty days late with a payment.
- Interest rate increases can no longer be applied to existing balances. Interest can only be raised on new credit card charges.
- Any payments above the minimum must be applied first to the balances carrying the higher interest rates.
- When it comes to minimum payments, lenders must explain how long it would take to pay off the card’s balance if only minimum payments are made, including disclosing how much of that total is interest. New bills much also disclose how much a lender has to pay each month to reduce the balance to zero within three years.
- Annual fees cannot cost more than 25% of a credit card’s initial credit limit.
- Borrowers can avoid over limit fees without tracking every penny. Credit card holders cannot automatically exceed their credit card balance for an additional charge without prior explicit approval. They must overtly choose and agree specifically to participate in such a program.
- People under 21 must prove that they can actually handle credit card debt or have a co-signer. Expect number the bankers’ tables that sprout outside of students unions each fall to diminish.
- Fees on sub prime and low limit cards are restricted.
- Fees on gift cards, such as inactivity fees must be clearly enumerated.
- Penalties to lender violators have been significantly increased compared to current law.
- Regulators must report to Congress annually on the success of the new rules.
Credit card companies have been scrambling to implement the latest changes. The first round took effect in August. Those required banks to give 45 days advance notice of increasing a credit card rate. Borrowers who choose not to accept the rate, can agree to cancel a card and agree to pay off debt over five years. Unfortunately doing so will lower one’s credit score, because a borrower’s percentage of credit utilized will drop.
As of September 22 lenders had to mail statements three weeks in advance of a bill’s due date, not two. Additionally, the due date for a payment must be the same each month. Payments cannot be due earlier than 5 PM on a business day. If the payment is due on a weekend or holiday, the deadline is extended to the next business day.
As President Barack Obama said when he signed the act, “With this new law, consumers will have the strong and reliable protections they deserve. We will continue to press for reform that is built on transparency, accountability, and mutual responsibility – values fundamental to the new foundation we seek to build for our economy.”