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The Card Act of 2009

The new Card Act of 2009 has been hailed by many as a great victory for consumers. It is true that the use of some of the most predatory fees by credit card issuers, such as late fees and over the limit fees are now more restricted. Others, such as inactivity fees have disappeared altogether.

There are also some restrictions to interest rate changes, but the central problem of limiting the large spread between the costs of money, as measured in the discount rate, LIBOR, or whatever other rate the card issuer uses, and the rates charged by credit card issuers to their customers, has been left untouched.

In fact, overall average annual interest rates have increased steadily, according to IndexCreditCards.com and are now (October 2010) at 16.79% (average Consumer Credit Card). It is over 1.5 percentage points higher than a year ago. An increasing number of cards have switched from fixed to variable rates.

The default rate is still high and with the continued problems in the employment market will remain at a high level. It is likely, that credit card issuers make up some of the revenue losses caused by defaults and more limited fees with the higher interest rate.

The Changes of the Act and how they affect you

One of the aims of the Card Act of 2009 is to prevent unfair increases in the interest rates and changes in the Term of the Credit Card Agreement. The following table shows you a summary list of the changes that directly affect the credit card holder.

The Changes brought about by the Credit Card Act of 2009
	Interest Rate	Card issuers cannot raise their interest rate for one year after the card account has been opened and the credit card is issued
		Thereafter, changes in the interest rate, fees and finance charges have to be notified to the credit card holder 45 days before they take effect.
		Promotional interest rates have to last at least six months
		Requires a credit card issuer, who increases a cardholder's interest rate (e.g. as a result of over-the-limit use or a late payment) to periodically review and decrease the rate if indicated by the review.
	Fees and Penalties	Charging a fee, except for over the counter payments ("expedited payment"), for the payment of credit card debt, however this is done, is no longer allowed
		Charging over the limit fees is only allowed if the customer elects to allow the issuer to complete an over the limit transaction (opt-in). The amount of this charge will be limited. If the credit card holder does not opt-in, then the credit card company will simply decline such a charge.
		Penalty fees (e.g. for non payment) have to be reasonable and proportional to the violation. The act also enhances protection against excessive fees on "low credit", high fee" credit cards (usually obtained if you have poor credit scores)
		Credit Card Companies can no longer charge an inactivity fee
	Credit Card Payments	Payments in excess of the minimum payment have to be applied first to the credit balance with the highest rate of interest (remember, credit cards charge different rates of interest for, balance transfers, purchases of goods and services and cash withdrawals, with the last one attracting the highest rate of interest)
		Credit Card statements have to be mailed 21 days before the bill is due (rather than the minimum of 14 days prior to the Act). It also prohibits credit card issuers from setting early morning deadlines for credit card payments (this used to be done by some of the more marginal credit card issuers in order to get additional default and late payment fees)

Disclosure and Fee Charging Issues by Credit Card Issuers

	Clear and Better Disclosure of Terms and Conditions	When terms are changed on the annual renewal date of the credit card agreement the credit card issuer has to clearly state which terms have changed.
		The Credit Card issuer has to disclose in each Statement the period of time and the total interest payment if only minimum payments are made on the outstanding debt. In addition, the credit card issuer has to state in each billing statement, the due dates and applicable late payment fees/penalties
	Protecting the rights of the financially responsible Credit Card User	The credit card issuer is now required to consider a consumer's ability to pay when issuing a credit card or when increasing a credit limit!
		Charging late fees, if the credit card issuer delayed crediting a received payment is prohibited!
		If a credit card payment has been made at a local branch office of the credit card issuer, it has to be credit to the account the same day.
		Provided interest payments are made on time, the credit card issuer is only allowed to charge a rate of interest calculated on the basis of the daily average rate. The widespread use of rate calculation using the average double cycle method is hereby banned. This lowers the total amount of interest paid on the outstanding debt by the credit card holder.

Issues related to Special Cards and Young Card Holders
(18 to 21)

	Protection of Young People using Credit Cards	Applications for a credit card from young consumers under the age of 21 have to contain: The signature of a parent, guardian or another person who will take responsibility for the payment of the debt. Alternatively, proof that the applicant has independent means of repaying the debt is also accepted!
		Increases in the credit limit on the above accounts have to be approved by the guarantor (parent, co-signer, guardian etc.)
		Prescreened offers for young applicants (18 to 21) are only allowed to a limited extent
		Affinity arrangement between credit card issuers and universities have to be transparent and explicitly visible. Aggressive marketing of such cards is more restricted (but not forbidden!).
	Prepaid Gift Cards	All gift cards are to have a life span of at least five years. The practice of a "declining value" (if you do not use the card within a specified time) and hidden fees for those cards not used within a reasonable time is prohibited. (There is no definition of what a "reasonable time" is.)

Government Oversight and Control of Credit Card Companies

	Measures designed to strengthen the Federal Governments oversight over Credit Card and related Companies	Each Credit Card Issuer is now required to post its credit card agreements on the Internet and to provide those agreements to the Federal Reserve Board for posting on its own web site.
		The Federal Reserve Board is also required to review the consumer credit market, including the terms of credit card agreements and the practice of credit card issuers. This includes the costs and availability of credit to consumers.
		The Federal Trade Commission is now required to watch the rules of companies to prevent deceptive marketing of "free" credit reports.
		The existing penalties for companies that violate the Truth in Lending Act for Credit Card Customers are increased.
	Transparency in Credit Card Pricing	The GAO is required to study the impact of interchange fees on consumers and merchants, specifically their disclosure, pricing, fee and cost structure.
	Small Business Protection	The Federal Reserve is to study the use of credit cards by small businesses and make recommendations for administrative and legislative proposals.
		A Small Business Information Security Task Force is to be established to address the information technology security needs of small business and help prevent the loss of credit card data.
	Financial Literacy Promotion	A comprehensive summary of existing financial literacy programs and the development of a strategic plan to improve financial literacy education is required. (It is not stated who will be responsible for that!)

Source: Senate Committee on Banking - Credit Card Summary - Final Passage May 19 2009

The Act, while making some important and long overdue changes in consumer protection, contains an extraordinary jumble of ideas. For instance, young people should have some protection against predatory credit card marketing, especially if they come from affiliates of their own universities. However, if you are 18, you are either an adult and understand what your duties and responsibilities are, and can handle them and their consequences, or you do not belong into a university, or another higher education establishment in the first place!

There is no doubt credit card issuers will make up some of the loss in revenue from predatory fees through measures like annual membership fees. Some of those, ranging from $50 to $500 have already been increased. Interest rates are also slowly creeping up. Other areas of higher costs will be fees related to cash advances.

Finding a credit card will also become more difficult. Especially if you are "challenged" with your FICO credit score and deemed to be a bad risk for credit card issuers. You should look at web sites such as creditcards.com or cardratings.com, if you search for the right credit card for you.

The likely Impact these changes will have on an individual Credit Card Holder
	If your Credit Card Issuer charges an annual Membership fee, it is likely to increase. You could also suddenly be asked to pay an annual membership fee, if the card was free up to this time.
	Interest rates will be increased to make up for lost revenue from fees
	If you do not use your card over an extended period of time (say six months), it is likely to be cancelled.
	It will be more difficult to obtain a credit card. Especially if you have a low FICO Score.