How the Credit CARD Act Is a Net Win for Consumers

Landmark credit card reform legislation enacted by President Obama in 2009 reached its final phase of implementation last Sunday, August 22.  Called the Credit Card Accountability, Responsibility, and Disclosure Act of 2009, the bill significantly impacts U.S. consumers – or, more precisely, their wallets.

Still in the dark about the Credit CARD Act’s fine print? We’re here to help!

Put simply, the bill improves disclosure, bans unfair rate increases, places limits on fees and penalties, and offers more protection to young consumers. Thanks to these policy changes, credit card companies now have to:

• Stop charging you interest on both the current and previous month’s balance (an industry practice known as double cycle billing);
• Inform you 45 days before increasing your interest rate and only apply interest rate hikes to new debt;
• Keep penalties under $25 and stop slamming you with multiple penalties for a single violation;
• Maintain the introductory interest rate on new credit cards for one year;
• Stop offering credit to consumers under age 18 and to college students with no verifiable income; and
• Stop charging fees for telephone- and web-based payments.

While some of these changes went into effect as early as February 2010, the legislation’s final phase was completed this month.

Although greater transparency and more protection for credit card consumers is cause for celebration, unfortunately, there are some unintended consequences:

• First, in response to tighter restrictions, credit card companies have significantly increased interest rates across the board. Take a look at your latest credit card statement, and you’ll likely feel the squeeze of an increased interest rate and, quite possibly, a decreased credit limit.
• Second, despite all this increased regulation, gaps and loopholes still inevitably exist. For instance, if you’ve made more than one late payment in the last six months, your credit card company can charge you more than the newly-imposed $25 penalty limit.
• Third, some large banks have started to parse through employment and income data to determine the risk level of existing customers. As a result, you’re more likely to be denied credit if you’ve lost your job or are earning less.

On balance, the Credit CARD Act is a victory for consumers who got lost in the endless misleading bank policies of the past. With few exceptions, gone are the hidden fees that you never knew existed – double cycle billing, anyone? Instead, you’re now more likely to pay credit card costs up front in the form of higher interest rates and annual fees and fewer rewards.

Until next week,

Sunaena Chhatry
Senior Policy Associate

Photo credit: Andres Rueda