Credit CARD Act

Consumer protections for rate changes, fees and account repayment

The first part of the Credit CARD Act is designed to improve the protections consumers have against unfair account changes and repayment policies. This is where the Credit CARD Act really gets its reputation as a Credit Cardholders Bill of Rights, because it guarantees the following:

• Creditors must inform a consumer no later than 45 days prior to any change in interest rate that wasn’t outlined in the original service agreement – i.e. unless it’s a an introductory rate that expires after a set amount of time, your rates can’t change without notice.
• Rate increase notices have to include a right to cancel disclosure that allows the account holder to cancel the account without causing added penalties or triggering something like immediate repayment of the account
• Creditors are also only allowed to enact a rate or finance charge increase IF:
  1. there is an introductory or promotional rate that expires after a certain amount of time
  2. the rate change results because that account is tied to an index – like how the Treasury Note Index impacts student loan interest rates
  3. the increase is the result of the consumer completing a hardship program OR failing to complete the program as required
  4. the rate increase is the result of the account holder not making their payments – i.e. a penalty interest rate
• Creditors also can’t change how an account holder’s minimum payment requirements are calculated. In other words, they can’t just decide you have to pay 5% of the current balance instead of 2% if your original credit agreement said the minimum payments would be set at 2%.
• If a cardholder’s rate has been increased because of market conditions or the credit risk the consumer poses (i.e. the account holder made some late payments) then the creditor must have methods in place to consider the borrower’s eligibility for interest rate reductions and the account must be reviewed every 6 months.
• The minimum term for introductory interest rates on new credit card accounts is set at 12 months, while the minimum term for promotional rates is set at 6 months.
• Interest and finance charges cannot be applied if a borrower repays any the extended credit within a certain amount of time – this is known as the grace period. In other words, if you make charges but pay off those transactions before the billing cycle grace period ends, then the creditor can’t apply added interest and finance charges.
• Over-limit fees cannot be imposed on an account unless it was explicitly outlined in the service contract. An over-limit fee can only be imposed once per billing cycle and only twice in two consecutive billing cycles if the consumer received a credit limit increase.
• Payment method fees – i.e. fees imposed for paying by phone or online or by mail – are prohibited, so you can’t be charged more for paying through the company’s website or by mailing a check, unless the payment involves some kind of expedited service.
• All fees applied for accounts that are violating some part of the agreement – i.e. penalty fees – like late charges and over-limit fees must be reasonable and proportional to the violation that caused the fee to be applied.
• All payments made by 5:00PM on the date the payment is due cannot generate additional finance charges, even if that payment is made through a local branch office of the financial institution associated with the account.
• If you make a payment that’s in excess of the minimum payment requirement, the creditor must apply the extra funds to the portion of the balance that has the highest APR first. All extra payments will be applied to your balance in order of APR.
• Credit cards known as “fee harvester” cards that have extra fees required in the first year the account is opened have a limit to the fees that can be assessed – they can’t be more than 25% of the total amount of credit available in the credit line. The fees also can’t be taken out of the credit line itself.
• Monthly payment due dates must always be on the same day of the month. If that day is a holiday or vacation, the payment must become due on the next business day.
• Periodic statements (i.e. your monthly bills) must be mailed 21 days prior to the due date; if a grace period is provided, the statement must include the date that finance charges would be imposed
• If a creditor violates TILA or any part of these revisions, creditor liability is limited to twice the amount of any finance charge applied to the transaction, at a minimum of $500 and a maximum of $5,000
• A credit card issuer must consider a consumer’s ability to repay when opening credit lines or extending additional lines of credit.

Credit card disclosures required by law

In addition to the protections listed above, the Credit CARD Act also provides regulations for disclosures that must be included on your credit card statements and/or original agreement, as well as disclosures that must be maintained on the company website.

• Your monthly account statements must always include a minimum payment warning: “Making only the minimum payment will increase the amount of interest you pay and the time it takes to repay your balance.”
• Near the minimum payment requirement, the statement should list:
  • the total number of payments it would take to eliminate the debt while following the minimum payment schedule
  • the total cost (interest plus principal) to pay off the balance with minimum payments if no other charges are made
  • the monthly payments required to eliminate the debt in 36 months
  • a toll-free number for information about credit counseling and debt management services
• Statements must prominently include the due date for the payment OR the date late fees would be applied to the account. If one or more late payments will result in a penalty interest rate, that must be explicitly stated as well.
• All credit card agreements have to be posted where they can be accessed on the company website. The federal government also maintains a repository of these agreements. Note that these are not contract-specific for individual accounts – they’re the basic agreements for accounts from that creditor, in general.
• If a free credit report is offered with a credit card or credit account, the offer must also include a statement that, “This is not the free credit report provided for by Federal law.” It must also provide the actual website for free credit reports – annualcreditreport.com.

Protecting young consumers

The next part of the Credit CARD Act is intended to protect young consumers from being preyed upon by creditors and moved into credit card accounts that they can’t afford when just starting out.

• Credit cards can’t be issued to consumers under the age of 21 without a cosigner.
• The cosigner must be a parent, legal guardian, spouse or other individual over the age of 21 with the means to repay the debt.
• That cosigner must provide written authorization to open the account.
• Prescreened credit offers are also prohibited to anyone under the age of 21
• The parent must provide written approval to authorize credit limit increases on accounts for those under 21 and college students.
• Creditors can’t offer “tangible items” to incentivize college students to apply for a credit card on campus, near it or at any event related to the school.
• Creditors have to publicly disclose if they have an agreement with a college for marketing credit cards on campus.

Consumer protections for gift cards

This final consumer-related section of the Credit CARD Act relates to gift cards, prepaid cards and gift certificates. There’s a final section for “miscellaneous provisions” that really just summarizes different congressional and government reviews of credit and lending practices, such as a study on financial literacy and a report on emergency PIN technology.

However, the gift card section is really the last consumer-based section. It simply states:

• Service fees for holding a card or certificate without using it (also known as a dormancy fee) are expressly prohibited unless then fee was disclosed AND the card or gift certificate was not used in the past 12 months
• It’s also expressly prohibited to sell gift cards with an expiration date unless the expiration is at least 5 years after the date the card was issued AND the date was explicitly stated