What is the CARD Act of 2009?

The Credit Card Accountability Responsibility and Disclosure Act of 2009, commonly called the CARD Act, is a federal law that fundamentally changed credit card issuers’ practices and consumers’ rights.

The law added new protections to the Truth in Lending Act, requiring issuers to more clearly inform consumers about credit card terms and to give cardholders a heads up before making certain changes to their accounts.

What does the CARD Act cover?

The CARD Act covers many facets of credit card users’ experiences. Thanks to this law, cardholders are protected from retroactive interest rate increases on existing card balances and have more time to pay their monthly bills, greater advance notice of changes in credit card terms and the right to opt out of significant changes in terms on their accounts.

The law gave consumers a bit more time — 45 days instead of 15 — to shop around for better deals if they don’t like the new terms.

The law also limits some credit card fees, curtails unfair billing practices and restricts marketing aimed at consumers under age 21.

“The most vulnerable consumers, those who carry a balance, have been protected by the protections of the CARD Act,” says Chi Chi Wu, attorney for the National Consumer Law Center, a Boston-based consumer advocacy group.

“Some of the worst abuses were addressed, including retroactive rate increases. It put the brakes on some of the fees. They are still kind of high, but it kept them from going up,” Wu says.

Here’s an overview of the CARD Act’s highlights:

Limited interest rate hikes

Interest rate hikes on existing balances are allowed only under limited conditions, such as when a 0% APR promotional rate ends.

The issuer has to clearly inform the borrower about the interest rate going up after the promotional period ends, and about the length of this promotional period, before signing up the consumer for such a promotion. This increased rate also can’t apply to transactions that occurred prior to the beginning of the promotion.

Interest rate hikes could also come about if there is a variable rate or if the cardholder makes a late payment.

The law also permits an interest rate hike after the borrower completes a workout or exits a “temporary hardship arrangement,” or doesn’t comply with the rules of any such workouts or arrangements. The hiked-up rate in these cases cannot be higher than the rate on such transactions before the workout or arrangement began.

In addition, interest rates on new transactions can increase only after the first year. Significant changes in terms on accounts cannot occur without 45 days’ advance notice of the change.

Limited universal default

“Universal default,” the practice of raising interest rates on customers based on their payment records with other unrelated credit issuers (such as utility companies and other creditors), was ended for existing credit card balances. Card issuers are still allowed to use universal default on future credit card balances if they give at least 45 days’ notice of the change.

The right to opt out

Consumers have the right to opt out of (or reject) certain significant changes in terms on their accounts. Opting out means cardholders agree to close their accounts and pay off the balance under the old terms. They have at least five years to pay the balance.

Limited credit to young adults

Credit card issuers are banned from issuing credit cards to anyone under 21, unless they have adult co-signers on the accounts or can show proof they have enough income to repay the card debt.

Credit card companies must stay at least 1,000 feet from college campuses if they are offering free pizza or other gifts to entice students to apply for credit cards. They also cannot extend these younger consumers’ credit lines without the co-signor’s signed consent to this increase, and acceptance of joint liability. In general, card issuers cannot open a credit account for anyone, or extend a customer’s credit limit, without looking into their ability to repay under the terms of the account.

Clearer due dates, times

Issuers have to give card account holders “a reasonable amount of time” to pay on monthly bills. That means payments are due at least 21 days after they are mailed or delivered.

Credit card issuers are no longer able to set early morning or other arbitrary deadlines for payments. Cutoff times set before 5 p.m. on the payment due dates are illegal. Payments due at those times or on weekends, holidays or when the card issuer is closed for business are not subject to late fees. Due dates must be the same each month.

There also need to be clear disclosures on monthly credit card statements about the date a payment is due, and about the fee for late payments.

Highest-interest balances paid first

When consumers have accounts that carry different interest rates for different types of transactions (e.g., cash advances, regular purchases, balance transfers or ATM withdrawals), payments in excess of the minimum amount due must go to balances with higher interest rates first.

Previously, it had been a common practice in the industry to apply all amounts over the minimum monthly payments to the lowest-interest balances first — thus extending the time it takes to pay off higher-interest-rate balances.

And if the card issuer makes any significant changes, regarding, for example, where to send payments or how it handles card payments, and this results in any delay to the payment being credited in a 60-day period following the change, the issuer cannot charge the cardholder a fine or interest on the payment.

Restrictions on over-limit fees

Consumers must “opt in” to over-limit fees. Those who opt out will have their transactions rejected if they exceed their credit limits, thus avoiding over-limit fees. Fees cannot exceed the amount of overspending. For example, going $20 over the limit cannot carry a fee of more than $20.

The issuer should notify those who opt into over-the-limit protection that they can choose to opt out of this arrangement if they wish. The issuer can impose only one over-the-limit fee in a billing cycle. However, the fee could apply once in each of the two following billing cycles unless the consumer has resolved the over-the-limit issue.

No more double-cycle billing

Finance charges on outstanding credit card balances must be computed based on purchases made in the current cycle, so card issuers cannot go back to the previous billing cycle to calculate interest charges. So-called two-cycle or double-cycle billing hurts consumers who pay off their balances, because they were hit with finance charges from the previous cycle even though they had paid the bill in full.

However, this does not apply to any adjustment to a finance charge due to the resolution of a dispute, or if a finance charge has to be corrected when a payment is returned because money is not available.

Rules for subprime cards

People who get subprime credit cards and are charged account-opening fees that eat up their available balances get some relief under the law. These upfront fees cannot exceed 25 percent of the available credit limit in the first year of the card.

Such fees do not include late fees, penalties for going over the credit limit and fines on payments that are returned because of inadequate funds.

Card applicants still need to be cautious: Some issuers pivoted to charging fees before accounts are opened.

Minimum payments disclosure

Credit card issuers must disclose to cardholders the consequences of making only minimum payments each month, namely how long it would take to pay off the entire balance if users only made the minimum monthly payment. Issuers must also provide information on how much users must pay each month if they want to pay off their balances in 36 months, including the amount of interest.

Late fee restrictions

Late fees are capped at $30 for occasional late payments; however, the fees can go up to $41 if cardholders are late more than once in a six-month period. The Consumer Financial Protection Bureau occasionally adjusts these fees based on inflation.

When the CARD Act went into effect, late fees were restricted to $25 for an initial default, going up to $35 for additional tardy payments in a subsequent six-month period.

Gift card expiration rules

Gift cards cannot expire sooner than five years after they are issued. Consumers should be able to easily locate the terms related to the expiry. Dormancy fees can be charged only if the card is unused for 12 months or more. Issuers can charge only one fee per month, but there is no limit on the amount of the fee.

What does the CARD Act not cover?

Although the CARD Act represented a big step forward, it has some limitations. For one thing, its protections apply only to personal credit cards; business and corporate cards are not regulated by this law. And there are several potential pitfalls for consumers that the law doesn’t address. These include:

Credit card companies still have a lot of leeway to raise interest rates. Issuers can raise rates on future card purchases, and there is no cap on how high these rates can go. Also, if credit card accounts are subject to variable APRs, as most are, the applicable interest rates can increase as the prime rate goes up.

Consumers can still find their borrowing ability constrained without notice. Credit card companies are free to close accounts and slash credit limits abruptly, and there’s no requirement that they give cardholders warning.

Card issuers can still push add-on products like debt protection that consumers might not want, need or fully understand. The law doesn’t rein in misleading marketing related to add-ons. It also doesn’t do much to ensure consumers have accurate information about the terms and costs of identity theft protection add-on programs.

The law doesn’t regulate rewards programs, which vary widely and can be difficult for consumers to compare. It doesn’t prevent issuers from making rewards hard to qualify for, nor does it bar them from changing rewards offerings so that they’re less valuable to cardholders.

Security is another gap in the CARD Act’s coverage. The law doesn’t add any new safeguards to protect cardholders’ personal data, and it doesn’t tackle unauthorized online transactions.

Bottom line

The CARD Act mandated greater transparency from credit card issuers and made it more feasible for cardholders to walk away before changes to their accounts take effect. It also capped some fees and restricted marketing to young adults.

The law didn’t regulate business cards, and it left some card features untouched. But all in all, it boosted consumers’ rights and had a significant impact on the credit card industry.