President Obama signed into law landmark credit card reform in 2010 that restricts interest rate hikes in the first year of credit card agreements, restricts increases on existing balances – except in the case of variable-indexed interest rates, and provides many other first-time protections for consumers.
Most of the reform’s provisions amend the Truth in Lending Act and took effect on Feb. 22, 2010, while others covering penalty fees took effect Aug. 22 of the same year.
Here is an overview of the key provisions of the Credit Card Accountability Responsibility and Disclosure Act of 2009, or Credit CARD Act:
- Generally, any increase in a credit card’s interest rate is prohibited in the first year of an agreement between card issuer and consumer.
- Generally, an increase in rates that apply to existing credit card balances is prohibited, with a few exceptions (see “Late Payments/Penalty APRs” below).
- Universal default, the practice of raising interest rates on customers if they are late paying an unrelated bill, such as a car loan or a utility bill, will be prohibited for existing balances.
- The credit card company must inform a consumer 45 days ahead of an increase in the interest rate, change in fees, or other significant changes in the terms of the account.
- If your credit card company is going to make any of these changes to the terms of your card, it must give you the option to cancel the card before the increases take effect. If you take that option, however, your credit card company may close your account and increase your monthly payment until the account is paid off.
- Interest-rate increase prohibitions DO NOT apply to variable interest rates tied to an index; your rate can go up whenever the index goes up.
Exceptions to Ban on Retroactive Interest Rate Increases
- Credit card issuers are prohibited from applying increased annual percentage rates and certain fees to existing credit card balances, except in the following circumstances:
(1) when a temporary or introductory rate – lasting at least six months – expires;
(2) when the rate is increased due to the operation of an index – a variable rate;
(3) when the minimum payment has not been received within 60 days after the due date; and
(4) when the consumer successfully completes or fails to comply with the terms of a workout arrangement.
Late Payments/Penalty APRs
- If you are 60 days late on a payment, the card issuer can impose a higher penalty APR on outstanding balances and future transactions — as long as a notice is provided with a “clear and conspicuous” written statement of the reason for the increase.
- The notice must clarify that the increase on the outstanding balance will terminate “not later than 6 months after the date on which it is imposed” if the credit card company receives the required minimum payments on time during that period.
- Card users should keep in mind that the penalty APRs can remain in place for “future transactions” following the imposition of the penalty APR even after compliance during the six-month period.
- Credit card companies are required to obtain permission from the consumer before charging fees for transactions that exceed the credit limit.
- If a consumer “opts-in” to allowing transactions that go over the credit limit, your credit card company can impose only one fee per billing cycle. The opt-in can be revoked at any time.
- If your credit card company requires you to pay fees (such as an annual fee or application fee), those fees cannot total more than 25 percent of the initial credit limit. For example, if your initial credit limit is $500, the fees for the first year cannot be more than $125. This limit does not apply to penalty fees, such as penalties for late payments.
Allocation of Payments
- If you make more than the minimum payment, the credit card company must apply the excess amount to the balance with the highest interest rate.
- If you made a purchase under a deferred interest plan (for example, “no interest if paid in full by February 2012″), you must be allowed to choose to apply extra amounts to the deferred interest balance before other balances. Otherwise, the credit card company must apply your entire payment to the deferred interest-rate balance first for two billing cycles prior to the end of the deferred interest period.
Payment Dates and Times
- You must be mailed or delivered your credit card bill at least 21 days before your payment is due.
- The due date should be the same date each month, and the payment cut-off cannot be earlier than 5 p.m. on the due date. If your payment due date is on a weekend or holiday, you must have until the following business day to pay.
- Your monthly credit card bill must give you a rundown on how long it will take you to pay off your balance if you only make minimum payments. It will also tell you how much you would need to pay each month in order to pay off your balance in three years.
- Issuers are prohibited from providing a credit card to a consumer who is younger than the age of 21, unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so.
- A cosigner must agree in writing to any credit limit increase.
- Card issuers are prohibited from offering free gifts in exchange for credit card applications on college campuses.
Here is a rundown on the provisions that took effect Aug. 22, 2010:
Reasonable Penalty Fees:
Penalty fees have been as high as $39, but the Fed has implemented a $25 limit. In addition, you cannot be charged a late payment fee that is greater than your minimum payment. For example, if your minimum payment is $20, your late payment fee can’t be more than $20. If you exceed your credit limit by $5, you can’t be charged an over-the-limit fee of more than $5.
Exceptions to the Penalty Fee Limit:
A credit card issuer can raise the penalty fee above $25 if:
- One of your last six payments was late, in which case your fee may be up to $35; or
- “Your credit card company can show that the costs it incurs as a result of late payments justify a higher fee.”
Your credit card issuer cannot charge you inactivity fees, or a penalty of not using your credit card.
You cannot be charged more than one fee for “a single event or transaction that violates your cardholder agreement.” For example, you cannot be charged more than one fee for a single late payment.
Re-Evaluation of Rate Increases:
If your card issuer increases your APR (annual percentage rate), it must re-evaluate that rate increase every six months. “If appropriate, it must reduce your rate within 45 days after completing the evaluation.”