The CARD Act of 2009 and What it Means for Credit Card Holders

On May 22, 2009, President Obama signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act. This is good news for many of us since, at least in the United States, we pay roughly $15 billion in credit card penalty fees every fear. Almost 80% of us have credit cards, and over half of us that do carry credit cards also carry credit card debt from one month to the next.

The CARD Act imposes new rules on credit card companies, thus making credit card payments more "logical" and reducing interest fees. However, be aware that the new Act also allows creditors to penalize you more severely should you default or be late with your payments, or keep high balances on your cards.

So, what are the key features of the CARD Act?

1. No more freebies for college students. The CARD Act stops companies from offering incentives (T-shirts, mugs, gift cards) for college students who sign up for their credit cards. Also, credit cards will no longer be sent to students who haven't specifically applied for them.

2. Extended time for payment. Companies typically set the due date on a credit card bill just 14 days after it is mailed to the cardholder. The CARD Act extends that time to at least 21 days. As long as you send in your payment up to 21 days following your bill's cycle close date, you will not be assessed any late fee.

3. No more double-cycle finance charges. Many companies calculate finance charges not just for the current billing cycle, but also for the previous one. The new Act puts a stop to double-cycle billing and thus reduces these unreasonable finance charges.

4. A static first year APR rate. If a company quotes an annual percentage rate (APR) of 1.9% to you for the first year that you hold its credit card, that APR cannot change for the entire first year. The only exception to this rule would be if you were over 30 days late with your payment.

5. Notification of APR changes. After the first year that you hold a credit card, the issuing company may raise its APR. However, it must notify you of the APR change at least 45 days in advance. Furthermore, the APR increase can apply only to new balances that accumulate after the new APR's start date.

6. Payment of high-interest debt. In the past, if you had different interest rates on a single credit card, companies applied your monthly payment to pay off the balance with the lowest interest rate first. With the CARD Act, your payment will now be applied to the balance with the highest interest first. Alternatively, credit card companies will divide your payment equally between different interest rate balances. It may be best to find out what your particular credit card issuer chooses to do once the CARD Act goes into effect.

7. Minimum payment disclosure. Credit card issuers must disclose how long it will take to pay off a credit card balance if you make only the minimum payments every month. Additionally, you must be informed of how much you should pay each month if you wish to repay your entire balance in 36 months (including accrued interest).

8. Sub-prime credit relief. Previously, if you had a very low credit rating, companies would issue you a credit card with very low spending limits and very high interest and other fees. In some cases, the fees could be half, or even more, of the balance on the credit card. Under the CARD Act, the initial charges can be no more than 25% of the credit card's balance limit. Also, in the first year, no more than 50% of the original credit limit can be used to pay fees.

Will the CARD Act help or hurt consumers in the long run? One argument is that, because the CARD Act better protects the riskier borrowers from penalties and fees, credit card issuers will see a smaller return on their investment with such borrowers. As such, companies will be less inclined to pursue them, and borrowers with low credit ratings will subsequently have a harder time obtaining credit.

Credit card holders who are more prudent with their spending may lose out on past benefits. There is the expectation that credit card issuers will raise annual fees, and cut back on incentives programs like gift cards, flight miles, hotel stays, and purchase points. Finally, penalties for late or defaulted payments are expected to increase considerably.

Incidentally, the CARD Act changes are expected to go into full effect about 9 months from the signing of the Act (so, about February of 2010).