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The New Rules for Your Credit, Debit, ATM and Gift Cards

On May 22, 2009 President Obama signed the Credit Card Accountability, Responsibility, and Disclosure Act of 2009.  This new law, better known as the CARD Act, was implemented throughout 2009 and 2010.  The purpose of the Act, as is common of many laws, is to protect consumers from deceptive practices and actions of the credit card industry.  The purpose of this piece is to provide an overview of the CARD Act’s protections and what they mean to you, the American credit card user.

21-Day Grace Period – Your credit card issuer must now send you your statement a full 21 days before the due date.  Before the CARD Act, grace periods had shrunk down to 14 days.  This additional week will help consumers who depend on their bi-weekly paycheck in order to pay their bills on time.

Under 21 Years Old, No New Credit Cards – The CARD Act prevents credit card issuers from opening new accounts for consumers who are under 21.  There are two ways around the under-21 rule.  If you have a job or can prove you have the capacity to make your payments then you can open a card.  Or, if you are able to convince someone to co-sign for you then you can open a card as well.

Now More Over-Limit Fees – When you make a purchase that takes you over your credit limit credit card issuers used to be able to charge you an over limit fee, usually around $35.  This is no longer allowed unless you give your credit card issuer permission to charge you the fee.  If you do not then any transaction that would take you over your credit limit will be denied at the register or point of sale.

Advance Notice for Adverse Changes to Your Credit Card Terms – If your credit card issuer wants to increase your interest rate, add a new fee or increase an existing fee they are still allowed to do so under most circumstances.  However, they must notify you 45 days in advance of making the change and allow you to “opt out.”  There are some exceptions to the 45-day rule.  They are…

  • If you have a variable interest rate, a rate tied to a moving index, and the index increases then the card issuer does not have to notify you of your new higher rate.
  • If you have an introductory or “teaser” rate that has expired then the issuer does not have to notify you of the new higher rate.

Additionally, if you choose to opt out of the new rate or new fee then the issuer can close your card and accelerate the payback of the outstanding balance.  And, there is no acknowledgment provision regarding the 45-day notice.  If they send it and you ignore it, trash it or don’t understand it they’ve still complied with the law.

No Retroactive Rate Increases – Credit card issuers used to be able increase the interest rate on existing balances.  This is not allowed any longer.  If your credit card issuer increases your interest rate then the new higher rate will only be applied to new purchases.

Late Fee Restrictions – Your late fee must be more in line with the amount of your delinquency.  For example, if your minimum payment was only $12 and you were late then the late fee cannot exceed $12.  Late fees cannot exceed $35.

Pay Off and Interest Disclosure – Your credit card statement must now contain a chart or table clearly showing you how long it would take to pay off your credit card balance if you only make the minimum payment.  And, it must also show you how much interest you’ll pay by doing so.  This has been hailed as the most valuable component of the CARD Act.

Inactivity Fees – You can no longer be charged a fee for card dormancy.  These fees became moderately popular at the beginning of the credit crisis in late 2007.  The credit card issuer can, however, close the account because of dormancy. 

Interest Rate Decreases for On-Time Payments – If your credit card issuer increases your interest rate because of delinquency then they must considering lowering your rate if you make payments on time for 6 consecutive months.

Gift Card Protections – Any gift card that was purchased after August 22, 2010 must following these guidelines regarding expiration or reduction in value.  The card must be good for a full 5 years from the date of purchase.  Any fees charged to your card must be clearly disclosed to the purchaser.  A dormancy fee can be still be charged against the card’s value but only if you don’t use the card for 12 consecutive months.   

Free Credit Report Rule – This one was an interesting addition to the CARD Act considering it has nothing to do with credit cards.  Any website that markets a free credit report must now disclose that the free credit report they’re giving away is not the same free credit report that is mandated under Federal law and available via www.annualcreditreport.com.

Restriction on Some Overdraft Fees – This isn’t a CARD Act provision but it’s still applicable to debit and ATM cards so I figured I’d throw it in.  As of August 22, 2010 every single person in this country who had overdraft protection for debit card and ATM card usage lost it.  And at the same time the banks lost the ability to charge overdraft fees for debit card and ATM card usage that took you under the $0 mark on your account.  You have to proactively opt back in if you want to continue to have the coverage.  If you opt in then the bank or credit union can once again charge you the overdraft fee.  If you do not opt back in then any transaction that would take you below $0 will be declined.    

Now that we know what’s no longer allowed under the CARD Act, let’s take a look at what’s still allowed…

Universal Default – This is the practice of increasing an interest rate because you missed a payment on another card.  For example, the interest rate on Credit Card A goes up because you missed a payment on Credit Card B.  This is still allowed under the CARD Act as long as the issuer of Credit Card A sends you a 45-day advance notice of the rate increase.    

Credit Limit Reductions – Not only are credit limit reductions still fully allowed under the CARD Act but no advance notice is required.  The only notice that’s required is pursuant to the Fair Credit Reporting Act’s rules of Adverse Action.  If a credit report or credit score is used as a basis for the reduction then the issuer must send you a notice stating as such.  But, the notice does not have to be sent in advance of the reduction.

Account Closures – Again, closures are fully allowed and no advance notice is required.  However, the same adverse action rules explained above apply with account closures.  The credit card industry argued that giving consumers 45-day advance notice of credit limit reductions or account closures would lead to cardholders maxing out their cards to avoid losing the benefit of the “open to buy.”

Everything Prohibited by the CARD Act … – …is still 100% allowed for small business credit cards.  None of the protections explained above apply for credit cards issued for small businesses.  These cards, also called professional cards, are being more heavily marketed now because of the significant CARD Act loophole that neglects their inclusion.  Small business credit cards are almost always personally guaranteed so an argument can be made that they are, in fact, consumer credit cards.         

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.

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