Key Changes to the CARD Act

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The Federal Reserve issued new rules that expand consumer protections with credit card issuers.

Congress passed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) to level the playing field between credit card issuers and consumers. The law aimed to abolish major abuses in the credit card industry that unfairly hurt consumers. A slew of protections were put in place regarding rate increases, fee traps, required disclosures, accountability, and marketing to young consumers. Some of the new rules cut directly into the credit card companies’ profits.

Predictably, credit card issuers have shifted their practices, attempting to generate profits in ways that do not violate the terms of the Card Act. The Federal Reserve has reacted to this by issuing some new rules last week that aim to close some loopholes in the law that allowed the credit card companies to skirt the spirit of the law. The Fed’s amendments will go into effect on October 1, 2011.

Key Changes to the CARD Act

  1. Credit card issuers will now have to make a greater effort to establish an applicant’s ability to pay the credit line before credit is granted or when the credit line is raised. Under the new rules, “credit card applications generally cannot request a consumer's ‘household income’ because that term is too vague to allow issuers to properly evaluate the consumer's ability to pay. Instead, issuers must consider the consumer's individual income or salary.”
  2. The total of any fees charged to a consumer before a credit card account is opened is capped at 25% of the account’s initial credit limit. For example, if a creditor issues a consumer a credit card with a $500 limit, the card issuer generally is prohibited from charging more than $125 in fees for the first year that the account is opened.
  3. A credit card issuer can no longer ‘waive interest’ to avoid hiking an interest rate due to a late payment. For instance, many card issuers try to increase market share by offering a period of low or 0% interest on any transferred balances or purchases for a limited period of time. Under the rules that existed before the CARD Act was passed, if you were a day late on a payment, the promotional rate would be replaced by a sky-high penalty rate.  The CARD Act aimed to fix this problem, but credit card issuers developed a way to bypass the law. Essentially, the card issuers offered a high interest rate, but were willing to waive those high charges, if the cardholder paid the bill as agreed. If not, the waiver would be revoked, and the rates hiked to the non-waiver rate.  The Fed has closed this loophole, so that interest rates must remain at their promotional level all throughout the promotional period.           
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