In May 2009, the United States Congress enacted the Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”) which amended the federal Truth in Lending Act to include specific restrictions with respect to open-ended consumer credit accounts, including credit cards. Supporters of the CARD Act had four goals for credit card reform: (1) to provide greater consumer protection; (2) to require statements and other information sent by credit card companies to contain “plain language in plain sight”; (3) to allow consumers to shop around for a credit card that best fits their needs by requiring terms of credit card contracts to be easily available; and (4) to ensure that credit card issuers that engage in deceptive practices are held accountable. The CARD Act and its amendments became effective on February 22, 2010.
The CARD Act generally states that a credit card issuer must consider the ability of the consumer to make minimum payments under terms of a credit card account before a credit card account is opened for a new cardholder or the credit limit of an existing cardholder is increased. A credit card issuer must consider specific factors in evaluating a consumer’s ability to repay, including income, other assets, and current debt obligations. Credit card issuers must establish reasonable policies and procedures for making such evaluations.
The CARD Act provides that credit card contract terms must be clearly stated and constant for the first year after an account is open. The CARD Act prohibits credit card issuers from raising the annual percent rate (“APR”), fees, or finance charges during the first year.
Credit card issuers are also prohibited from increasing the APR for existing balances, except in the following circumstances: (i) after a period of a temporary rate lasting at least six (6) months has expired; (ii) when the rate is a variable rate tied to an index that is not under the control of the issuer; (iii) when a minimum payment has not been received within 60 days of the due date; or (iv) the increase is due to the cardholder’s completion of a workout arrangement with the issuer. Any increase in the APR due to nonpayment must be terminated after the cardholder makes timely payments for a six (6) month period.
Although a credit card issuer cannot increase the APR on existing balances except for the reasons listed above, the issuer can increase the APR on future balances. The CARD Act, however, requires that written notice of an APR increase be given to the cardholder no later than 45 days prior to the effective date of the increase. Card issuers are also required to provide 45 days notice of other changes in terms.
Monthly credit card statements also must clearly display the date on which a payment is due, the date on which a late payment fee will be charged, and the amount of late fee or charge that will be applied. If a default APR rate will be applied after a cardholder makes one or more late payments, the statement must clearly display the default rate on the statement in close proximity to the date on which the payment is due.
The CARD Act requires all penalty fees or other fees imposed to be reasonable and proportional to the cardholder’s violation of the credit card contract. Credit card issuers also may not charge a cardholder a fee to make a credit card payment, whether by mail, electronic transfer, or telephone authorization, except for expedited payments.
Credit card issuers are also prohibited from charging an “over-the-limit” fee for an extension of credit in excess of a cardholder’s credit limit unless the cardholder expressly permits the issuer to complete transactions over the cardholder’s credit limit. Even after a cardholder elects to allow over-the-limit transactions, the credit card issuer must provide notice to the cardholder that he may “opt-out” of such transactions in the future. The CARD Act also limits the number of over-the-limit transaction fees a credit card issuer may charge per billing cycle.
The CARD Act includes several provisions addressing the timing of payments and how payments are applied to existing balances. The due date for all payments under a credit card account must be the same day each month and if a due date falls on a weekend or holiday on which the credit card issuer does not receive mail, a payment received on the next business day may not be considered late. Additionally, if a cardholder makes a payment at a credit card issuer’s branch office, the payment must be posted to the cardholders account that same day.
The CARD Act also requires that credit card statements must be mailed or delivered to the cardholder at least twenty-one (21) days before the payment is due, a seven (7) day increase from the previous fourteen day requirement under the Truth in Lending Act.
Credit card issuers are also required to fairly apply payments made by the cardholder. If a cardholder makes a payment above the minimum payment, the credit card issuer is required to apply the excess to the card balance bearing the highest interest rate. Issuers also may not use the previous month’s balance to calculate interest charges for the current month’s bill.
The CARD Act includes several specific rules limiting the extension of credit to underage consumers. A credit card may not be issued to a person under the age of twenty-one (21), unless (i) he/she has a cosigner who is able to repay any debt incurred and to assume joint and several liability for the debt; or (ii) he/she submits financial information to the card issuer that indicates he/she has independent means to repay debt incurred. If a person under the age of twenty-one is issued a card with a cosigner, the cosigner’s approval is required to increase the credit limit until the cardholder reaches the age of twenty-one.
The CARD Act also addresses credit card offers aimed at college students. Credit card issuers are prohibited from offering students free gifts – which in the past have included t-shirts, gift cards, and magazine subscriptions – for applying for a credit card if the offer is made on or within 1000 feet of a campus or at an event sponsored by or related to the college or university. The CARD Act also encourages colleges and universities to adopt their own policies to regulate the marketing of credit cards on their campuses and suggests including credit card and debt education and counseling as a part of new student orientation programs.
In addition to credit cards, the CARD Act also limits fees on store gift cards, gift certificates, and general-use prepaid cards. Gift cards and certificates may not expire within five (5) years of issuance and any expiration date must be clearly and conspicuously stated. The Act also limits dormancy and inactivity charges that in the past have been imposed by gift card and certificate issuers if the consumer does not use the card or certificate for a certain amount of time. Such a dormancy or inactivity charge may only be assessed if (i) there has been no activity within a twelve (12) month period, (ii) the terms of the fee are clearly and conspicuously stated, and (iii) the issuer informs the purchaser of the fee before the card or certificate is purchased.