Legal Definitions - Credit Card Accountability Responsibility and Disclosure Act of 2009

The Credit Card Accountability Responsibility and Disclosure Act of 2009, often shortened to the Credit CARD Act of 2009, is a significant federal law designed to protect consumers from unfair and deceptive practices by credit card companies.

Enacted to amend the existing Truth in Lending Act, the CARD Act introduced a range of new rules aimed at increasing transparency in credit card terms and conditions, limiting certain fees and interest rate practices, and empowering consumers to make more informed financial decisions. Its core purpose is to ensure that credit card issuers operate with greater fairness and provide clear, understandable information to their customers.

Key provisions of the CARD Act include:

• Restrictions on Interest Rate Increases: Credit card companies generally cannot raise interest rates on existing balances unless an account is at least one year old, and they must provide a 45-day advance notice before any increase. This allows cardholders time to react, such as paying off the balance or finding a new card.
• Limitations on Fees: The Act requires that fees, such as late fees, annual fees, and over-limit fees, be "reasonable and proportional" to the cost incurred by the issuer. It also changed how over-limit fees are charged, requiring cardholder consent.
• Clear Billing Practices: It prohibits "double-cycle billing," a practice where interest was charged on balances that had already been paid off, ensuring consumers only pay interest on their most recent outstanding balance.
• Protections for Young Consumers: The Act established rules for individuals under 21 years old seeking credit cards, generally requiring them to have a co-signer or demonstrate independent ability to repay the debt.
• Enhanced Disclosures: Credit card statements must provide clearer information, such as the total interest paid over the year and how long it will take to pay off the balance if only minimum payments are made.

Here are some examples illustrating the impact of the Credit CARD Act:

• Example 1: Interest Rate Changes on an Existing Balance

  Imagine Sarah has a credit card with a balance of $2,000 at an interest rate of 15%. After six months of responsible use, her credit card company decides to raise the interest rate to 20%. Under the Credit CARD Act, the company cannot immediately apply this new, higher rate to Sarah's existing $2,000 balance because her account is less than one year old. Furthermore, even if her account were older, the company would be required to send Sarah a written notice at least 45 days before the new rate takes effect, giving her time to pay off her balance at the old rate or decide to close the account.

  This example illustrates the Act's protection against sudden and retroactive interest rate increases on existing balances, ensuring consumers receive adequate notice and are not penalized without warning.

• Example 2: Limitations on Late Fees

  David accidentally misses the payment due date for his credit card by one day. Before the CARD Act, his credit card company might have charged him a late fee of $50, even if his minimum payment was only $25. Thanks to the CARD Act, late fees must be "reasonable and proportional" to the violation. This means the fee is capped at a certain amount (adjusted for inflation) and generally cannot exceed the minimum payment due. So, David's late fee would likely be much lower, reflecting a more balanced penalty.

  This example demonstrates how the Act limits the amount and proportionality of fees, preventing credit card companies from imposing excessively high charges for common infractions.

• Example 3: Credit Cards for Young Adults

  Maria, an 18-year-old college student, wants to open her first credit card account to start building a credit history. Before the CARD Act, it was relatively easy for young adults to get credit cards, sometimes leading to unmanageable debt. Now, because Maria is under 21, the credit card company must either require a co-signer (like a parent) who is jointly responsible for the debt, or Maria must prove she has sufficient independent income to make payments. If she can show she earns enough from her part-time job, she might qualify on her own.

  This example highlights the Act's specific protections for young consumers, aiming to prevent them from accumulating debt they cannot repay by requiring a demonstrated ability to pay or a co-signer.