The Credit CARD Act of 2009

For many consumers, the Credit CARD Act of 2009 offered much-needed relief.

Until the bill’s passage, the credit card industry was rife with predatory practices. Card providers could raise interest rates without notice and market aggressively to young consumers. They’d allow customers to spend over credit limits and then levy high fees. Unfortunately, those infractions only scratched the surface.

Consumers were ready for a change, and Congress was ready to provide it. The Credit CARD Act was introduced in January 2009. When it passed, the act ushered in many important consumer protections that include interest rate stability, lower fees and clearer payment terms.

Credit CARD Act timeline

In 2007 and 2008, many financial institutions were heavily invested in subprime mortgages. And they were in trouble.

Namely, they found that borrowers were defaulting on their mortgages. That led to many banks shutting their doors. Insurance giant AIG collapsed, as did financial firms like Lehman Brothers and Bear Stearns.

In a plummeting economy, many Americans were forced to use their credit cards for daily living expenses. With many consumers stretched thin, they had trouble making payments. As they defaulted, banks handed out higher fees and interest rates.

To protect consumers, Congress created new regulations for the credit card industry. It would pass the Credit CARD Act before the turn of the decade.

Here’s a timeline of how the bill came into existence.

The 5 most important protections in the Credit CARD Act

The Credit CARD Act introduced many important rules to protect consumers. Here are the five of the most important ones.

1. Card providers have to tell you beforehand if they raise your interest rates.
Prior to the Credit CARD Act, card providers could raise interest rates without notice. Now they can only do so in certain circumstances, such as when a customer makes a late or returned payment.

Outside of these circumstances, your card provider has to notify you 45 days in advance if they increase your rates. On notification, you’re allowed to close your account without penalty fees. If you close your account, you have at least five years to repay your debt.

If your provider raises your interest rates due to risk factors that include your ability to repay, they must review your account every six months. If the risk factors change, they must lower your APR.

2. Card providers can’t retroactively raise your interest rates.
In most scenarios, your card provider can’t retroactively increase the APRs on your existing card balances. However, they can raise your interest rates if they’ve previously advertised that your promotional APR would expire. Providers must offer promotional APRs for at least six months.

3. You have more time to pay bills, and due dates are clearer.
Late fees are annoying, but they’re especially unwelcome when they seem unfair. Before the Credit CARD Act, card providers would set sneaky payment deadlines and penalize cardholders for paying late.

The Credit CARD Act requires card providers to offer a payment window of at least 21 days after a statement is posted. Providers can’t charge late fees when payments are due on weekends, on holidays or outside of business hours. They must set payment time cutoffs at 5 p.m. or later, and they can’t change customers’ payment due dates each month.

The act doesn’t require card providers to offer grace periods on interest, but grace periods must be at least 21 days long if offered.

4. You’re protected from some egregious fees.
The Credit CARD Act regulates the fees that card providers can charge. The fee for your first late payment, returned payment or overlimit penalty can’t be more than $25. Providers can increase these fees only It if you have another violation within six months.

Overlimit fees aren’t allowed unless cardholders opt in for overlimit transactions. Also, an overlimit fee can’t be more than the amount a customer overspends. For example, if you spend $15 over your credit limit, you can’t be charged a fee that’s higher than $15.

A provider can’t assess a fee for accepting bill payments — for example, through mail or by phone — unless the payment is expedited. And the act bars inactivity fees.

5. Payments over the minimum are allocated to higher-rate balances.
Here’s an example of payment allocation:

Say you have $100 in purchases, $200 in balance transfers and $300 in cash advances on your card. Your purchase and balance transfer APR is 15%, but your cash advance APR is 25%.

You pay $300 toward your card balance. Prior to the Credit CARD Act, your provider could choose how to allocate that payment. They’d likely apply it to your purchase and balance transfer debt, because that debt has a lower interest rate. In the end, they’d leave you with $300 in cash advance debt that’s accumulating at the higher 25% APR.

The Credit CARD Act requires providers to allocate your excess payment to your highest-interest debt first. Providers are still allowed to allocate minimum payments as they wish.

Other Protections

Here are a few more protections put in place by the Credit CARD Act.

Double-cycle billing is out

Credit card companies employ different ways of calculating your interest payments. The most common are by using your daily balance and average daily balance. Both of these methods use only the current billing cycle to calculate your interest. (Read our guide on credit card interest to see how these methods work.)

Before the Credit CARD Act, some companies used a method called double-cycle billing. This billing used the current and previous billing cycle to calculate your interest. The Credit CARD Act outlawed this method.

Restrictions on issuing cards to young consumers

Credit card providers can’t issue cards to anyone under the age of 21 unless the applicant has a cosigner or can prove their ability to repay. If the cardholder has a cosigner, the provider can’t raise the account’s credit limit without written approval from the cosigner. Card providers can no longer market credit cards on college campuses by offering promotional items.

No more fixed-rate bait and switches

Before 2009, card providers could lure consumers with fixed-rate credit cards and raise APRs later. The Credit CARD Act barred this practice, and you’ll rarely find fixed-rate cards these days.

More transparency for credit card terms

Credit card providers must clearly list late fees on credit card statements. They also have to upload cardholder agreements to their websites.
Your issuer has to tell you how long it’ll take for you to pay off your debt if you make only the minimum payment each month.

Limits on subprime card fees

Prior to the Credit CARD Act, subprime card providers could issue cards and immediately charge high fees. These fees would immediately eat into a cardholder’s credit limit.

The Credit CARD Act caps initial fees to 25% of a card’s credit limit.

What’s not covered

The Credit CARD Act created many protections, but many groups say it didn’t go far enough. Here are a few of the bill’s weaknesses.

• High fee limit. Some consumer groups say the $25 fee limit for a first-time violation is too high.
• Permanent penalty APRs. It’s still easy for card providers to solidify hiked interest rates.
• No rules on minimum payments. Card providers can still allocate minimum payments as they wish. And many issuers are allocating those payments to the lowest-rate balances. This is a significant problem, as a third of consumers pay the minimum each month.
• Subprime card loopholes. The Credit CARD Act bars card providers from charging initial fees over 25% of a card’s credit limit. However, subprime card providers can levy “processing fees” before activating customer accounts.

Consumer Financial Protection Bureau studies

After the Credit CARD Act passed, the Consumer Financial Protection Bureau (CFPB) launched two studies gauging the effectiveness of the bill.

Common questions about the Credit CARD Act of 2009